Saving for retirement can be challenging, especially if you have expenses you need to handle now. But the Saver’s Credit offers significant savings in the form of a tax credit for low- and middle-income individuals who start saving. In this article, we’ll discuss what the Saver’s Credit is, who is eligible, how much you can receive, and what are the advantages of using this retirement savings contribution credit when you invest in a tax-advantaged retirement account.
Saver’s Credit: Overview and Key Takeaways
As a general rule, Americans should have eight times their annual salary saved away by the time they reach 65 in order to have enough for retirement. Financial experts also include a milestone goal of having twice your salary saved before you’re 40 years old. However, most Americans fall short of these goals or even have no retirement savings at all.
In order to incentivize more saving, many individuals are eligible for the Saver’s Credit, a non-refundable tax credit given to qualifying people based on their income and savings contributions. The credit gives low- and middle-income individuals a tax credit for contributing funds through the employer’s defined contribution plan or through a traditional or Roth IRA.
The credit takes into consideration savings you make both through independent contributions and fixed transfers through your employer. It gives back a value equal to 10%-50% of your contributions, up to $1,000 (or $2,000 for married couples filing jointly), based on your income. A tax credit, unlike a tax deduction, reduces your total tax bill. If your tax bill is less than the credit you receive, then your tax bill is simply $0 and you can’t apply the remainder to another year.
Saver’s Credit: Eligible Individuals
Only eligible individuals can receive the Saver’s Credit. To be considered eligible, you must meet these requirements:
Turn 18 prior to the end of the tax year
Cannot be a student or a dependent
Must have made an eligible retirement account contribution
Have an adjusted gross income that does not exceed a set maximum that is established by the Internal Revenue Service
For 2024, that income cap is set as:
To be eligible for a 50% credit up to $1,000 ($2,000 if filing jointly):
Single Individuals: $23,000
Heads of household: $34,500
Married, filing jointly: $46,000
To be eligible for a 20% credit up to $1,000 ($2,000 if filing jointly):
Single Individuals: $23,001 - $25,000
Heads of household: $34,501 - $37,500
Married, filing jointly: $46,001 - $50,000
To be eligible for a 10% credit up to $1,000 ($2,000 if filing jointly):
Single Individuals: $25,001 - $38,250
Heads of household: $37,501 - $57,375
Married, filing jointly: $50,001 - $76,500
Other Considerations Regarding the Saver’s Credit
If you are younger than 50 years old and contributing to an Individual Retirement Account (IRA), you can only contribute a total of $7,000. You can contribute up to $8,000 if you’re 50 years old or older. However, other retirement account contributions do count towards what you can receive under the Saver’s Credit.
Retirement Accounts That Qualify for the Saver’s Credit
The accounts in which you can make eligible contributions for the Saver’s Credit include the following:
401(k) plans
SIMPLE IRAs
SARSEPs
403(b) plans
457(b) plans
501(c)(18) plans
It also includes after-tax contributions made to your tax-advantaged retirement accounts. However, rollover amounts (the amount you transfer from one employer-sponsored retirement plan to another or from an employer-sponsored plan to an IRA) do not count. Also, excess contributions to retirement accounts that exceed the annual cap don’t apply to your Saver’s Credit (and can be subject to penalty taxes). Receiving distributions from your IRAs or another retirement plan could also impact your eligibility.
Claiming the Saver’s Credit
If you want to claim the Saver’s Credit for your taxes, file Form 8880, Credit for Qualified Retirement Savings Contributions. While you can find instructions in Form 1040EZ, they will send you to Form 8880 for completion.
Effects of the Saver’s Credit
The Saver’s Credit has multiple benefits. First, and most directly, the Saver’s Credit reduces your total tax bill by the amount of credit you receive. But the pre-tax contributions investors make to their tax-advantaged retirement accounts also reduce the tax bill.
For example, if you make $25,000 a year and you invest $6,000 in your traditional IRA, you have reduced your taxable income to $19,000. As another benefit, this investment reduces your adjusted gross income to $19,000, which makes you eligible for the 50% tax credit instead of simply the 20% tax credit.
Encouraging People to Save
Ultimately, the Saver’s Credit is designed to encourage low- and middle-income individuals to save more for retirement. The Saver’s Credit is a far more direct and immediate benefit than the tax deductions and potential future earnings from a 401(k) or IRA. The Saver’s Credit also credits taxpayers with a large portion of their savings, rather than a smaller and less persuasive percentage. Even small contributions can help you prepare for future retirement and reduce your current tax bill.
Saver’s Credit: The Bottom Line
The Saver’s Credit is a valuable tool that taxpayers with an adjusted gross income of less than $32,500 can use to make saving for retirement much less of a financial burden. The credit offers direct savings on your tax bill of up to $1,000 if you file separately or up to $2,000 if you file jointly. Your credit can be 10%, 20%, or 50% of your retirement contributions up to that cap, which represents significant savings on your federal taxes and can help you prepare for the costs of retirement when Social Security won’t be enough.
If you sponsor a 401(k) plan or other tax-advantaged retirement accounts for your employees and you want them to know more about incentives for retirement saving, contact Human Interest today. We’re here to help by offering educational and advising services for our plan sponsors.
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The Human Interest TeamWe believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.
