Tax Credits for Qualified Retirement Savings Contributions

FT Contributor
An elderly couple calculating taxes and credits for retirement.
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If you’ve contributed to a retirement plan over the last year, you may be eligible for the Saver’s Tax Credit — previously known as the Retirement Savings Contributions Credit. This tax credit is aimed at incentivizing those in the low- to middle-income tax bracket to still make the effort to contribute to a savings plan, allowing them to better prepare for an independent financial future.

Who Qualifies for the Saver’s Tax Credit?

As with all tax-related concerns, it’s important to understand if you qualify for the credit before you take the time to fill out the paperwork involved.

Simply saving some money for retirement doesn’t automatically earn you the credit. Other conditions must be met, including income level requirements and retirement plan qualifications .

Qualifying Retirement Plans

First and foremost, in order to qualify for the Retirement Savings Credit, you (or your spouse if you’re filing jointly) must contribute to a retirement plan. Plans that are eligible include:

  • A Traditional or Roth IRA.
  • A 401(k), 403(b), SEP, governmental 457(b), or SIMPLE plan.
  • A 501(c)(18)(D) plan.

In addition, voluntary employee contributions to a qualifying retirement plan as well as contributions to an ABLE account may qualify. However, further conditions must be met. These can be found under the “Who Can Take This Credit” section of the General Instructions of Form 8880 (more information on Form 8880 can be found below).  

It’s also important to note that the contributions to these accounts must be “new” money that you’re saving instead of simply rolling over existing funds from other, non-qualifying retirement accounts.

Qualifying Income

Besides the fact that you must contribute to a qualifying retirement account, your adjusted gross income must also fall below certain thresholds in order to claim the credit. These are:

  • $64,000 if married filing jointly.
  • $48,000 if the head of a household.
  • $32,000 if filing under any other status.

Who Is Not Eligible for the Tax Credit?

While many people are eligible for this tax credit, there are a few scenarios in which it does not apply. Eligibility for the tax credit is forfeited if the filer is:

  • Under 18 — in 2019, this would mean you were born after January 1, 2002.
  • Currently being claimed as a dependent — if you were claimed as a dependent on another person’s return in 2019, it makes you ineligible.
  • A full-time student — this condition is met if you were a student for any part of five calendar months in the previous year. Full-time  typically means you took 12 or more credits at an institution of higher education (technical, mechanical, and trade schools also apply). This also includes full-time, on-farm training coursework provided by a local, county, or state government agency.

You can find the complete breakdown of eligibility for the tax credit in the General Instructions of Form 8880 under the section “Who Can Take This Credit.”

Form 8880 Instructions

Form 8880 must be filled out in order to apply for the Saver’s Tax Credit. Fortunately, it is short and straightforward. Relevant information required to fill out the form includes:

  • Your name.
  • Your Social Security number.
  • Your retirement contributions, sans any rollover funds.

Calculating Your Credit

The math required to calculate your credit depends on both the amount saved and your earnings for the year.

The credit consists of a percentage of your retirement account contribution equalling up to $2,000 ($4,000 if married filing jointly). This percentage is either 50%, 20%, or 10% depending on your income and your filing status.

For instance, a couple that is married filing jointly may claim the following credit:

  • 50% of their retirement savings if they earned $38,500 or less.
  • 20% of their retirement savings if they earned between $38,501 and $41,500.
  • 10% of their retirement savings if they earned between $41,501 and $64,000.
  • 0% of their retirement savings if they earned over $64,000, at which point they are no longer eligible for the credit.

For example, if a couple that is married filing jointly made $51,000 and contributed $3,500 to their retirement fund, they would be able to claim 10% of their contributions, or $350 as a credit.

Credit rates for both the head of household and other filing statuses can be calculated using the table in the 8880 form.

Is the Saver’s Tax Credit Refundable?

While a deduction is a quantity that reduces the amount of taxable income, a credit like the Saver’s Tax Credit can be directly negated from the total taxes that a person owes.

However, it’s also important to understand that the Saver’s Tax Credit is non-refundable. In other words, if the credit lowers your taxes owed beyond zero dollars, it cannot be applied as part of a tax refund.

Similar Tax Credits and Deductions

If you’re able to claim the Saver’s Tax Credit, here are a few other tax credits and deductions worth looking into:

  • The Earned Income Credit. This credit benefits workers who earn low to moderate incomes. Unlike the Saver’s Tax Credit, it is refundable.
  • Capital Gains Tax. This deduction allows an individual to avoid paying taxes on the money made on the sale of a home up to a certain dollar value.
  • Mortgage Interest Deduction. This deduction is available for qualifying taxpayers who have paid interest on a mortgage during the past year.

Whether you’re a young adult just beginning to save for retirement or an empty nester finishing your retirement savings journey, it’s wise to look into what other tax credits and deductions are available alongside the Saver’s Tax Credit.

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