The Saver's Credit: A Great Incentive to Save

Retirement Savings Contributions Credit Gives Tax Break for Saving

Apr 23, 2009

Saver's credit, a non-refundable tax credit aimed at boosting the retirement savings of low-to-middle income families, is a great incentive for building a nest egg.

The Saver's Credit, formally known as Retirement Savings Contributions Credit, helps low and moderate income families to save for retirement and earn a non-refundable tax credit. The tax credit can be as high as $1000 ($2000 for married filing jointly).

Who Is Eligible?

For the year 2009, a person is eligible to claim the Saver's Credit if his modified AGI is not more than:

To be able to claim the tax credit, a person must be 18 or more at the end of the year, he should not be a full time student and no one else should claim an exemption for him on their tax return.

Eligible Contributions

The following retirement contributions are eligible to be considered for tax credit.

Voluntary after-tax employee contributions to a qualified retirement plan are also considered eligible for the purpose of the credit.

Like the other tax credits, the Saver's Credit can increase a taxpayer’s refund or reduce the tax owed. The maximum that can be claimed is $1000 and $2000 for married filing jointly, the actual amount can be much lesser than that. As the Adjusted Gross Income of the taxpayer goes up, the claimable amount comes down. For example for the year 2009 a married person filing jointly with his wife with an AGI of $33000 or less can get up to 50% of his retirement contribution. The same person can only claim 20% of his contribution if his AGI goes up to $34000 in the following year.

The Saver's Credit is in addition to the other tax benefits available for retirement contributions. For example, most low income workers who contribute to a traditional IRA can take a deduction for their contributions. Similarly, although the Roth IRA contributions are not tax deductible, qualifying withdrawals are tax-free.

Distributions taken from a retirement plan during a 'testing period' may reduce the amount used to calculate the credit. The testing period is the two years preceding the year for which the credit is claimed, or January 1 to April 15 of the year following the year for which the credit is claimed.

The Saver's Credit is a great incentive for low to moderate income families to contribute to their retirement nest egg. Begun as a temporary measure in 2002, the Saver's Credit was made permanent under the Pension Protection Act of 2006.

For more information on Saver's credit, see IRS Publication 590, Individual Retirement Arrangements and Form 8880, Credit for Qualified Retirement Savings Contributions.

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