Retirement Savings Contribution Credit (Saver’s Tax Credit)
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Saving and investing are both important areas of finance individuals need to succeed in, yet many families often struggle to keep up with their expenses. Setting aside funding each month to fulfill retirement goals such as building up a retirement fund, saving for college education expenses, saving for family vacations, or simply investing for the future can be a difficult endeavor filled with many challenges and obstacles in the way. However, with systems in place, such as the non-refundable tax credit, commonly known as the retirement savings contribution credit, saving is made substantially easier for many families and individuals.
This saver’s tax credit allows families and individuals with modest or low incomes to enjoy tax breaks beyond the deductions they may receive from contributions related to their individual retirement accounts (IRAs) or other employer-sponsored retirement plans.
This way, by reducing the taxable income a family or individual brings in, a credit may offset the cost of funding a retirement account. This can ultimately bolster long-term saving strategies over time, allowing for more money to be invested into retirement accounts than otherwise would be possible. This option is available to independent eligible taxpayers 18 years of age by the end of the applicable tax year. Dependents or full-time students cannot receive this saver’s tax credit. Taxpayers who contribute to employer-sponsored retirement plans such as traditional and Roth IRAs, 401(k)s, SIMPLE, SEP, 403(b), governmental 457 plans, or thrift savings plans (TSP), are all eligible for the saver’s tax credit. Essentially this financial opportunity is available to almost all available employer-sponsored retirement plans, even for individuals who make contributions to these accounts on the behalf of other people or family members with disabilities.
For the 2022 tax year, the taxable income limits for the saver’s tax credit were released to be $68,000 for married couples filing jointly, $51,000 for heads of household, and $34,000 for singles and married individuals filing separately. However, for the 2023 tax year, the taxable income limits were increased to $73,000 for married couples filing jointly, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.
Another essential aspect to consider is the contribution caps set in place for the saver’s tax credit. The current maximum contribution is reported at $2,000 per household for those filing as a head of household, while the maximum for married couples filing jointly is $4,000. As a result, the maximum credit that can be claimed for heads of household is $1,000 (50% x $2,000) and $2,000 for married couples filing jointly (50% x $4,000).
In order to receive the designated benefits that the saver’s tax credit can provide, an individual’s adjusted gross income (AGI) must not exceed the following limits for the 2023 tax year:
Credit Rate:
- At 50% of one’s contribution
- Married Filing Jointly:
- AGI must not be more than $43,500
- Head of Household:
- AGI must not be more than $32,625
- All other Filers:
- AGI must not be more than $21,750
- Married Filing Jointly:
- At 20% of one’s contribution
- Married Filing Jointly:
- AGI between $43,501–$47,500
- Head of Household:
- AGI between $32,626–$35,625
- All other Filers:
- AGI between $21,751–$23,750
- Married Filing Jointly:
- At 10% of one’s contribution
- Married Filing Jointly:
- AGI between $47,501–$73,000
- Head of Household:
- AGI between $35,626–$54,750
- All other Filers:
- AGI between $23,751–$36,500
- Married Filing Jointly:
- At 0% of one’s contribution
- Married Filing Jointly:
- AGI more than $73,000
- Head of Household:
- AGI more than $54,750
- All other Filers:
- AGI more than $36,500
- Married Filing Jointly:
Helping you achieve your evolving financial objectives
This illustrates that the lower an individual’s AGI is, the higher their saver’s credit becomes, as there are three potential options for a saver’s tax credit of 10%, 20%, or 50% of the total amount contributed to a qualified retirement plan (QRP). For example, if a single tax-filing individual has an AGI of $19,200 for the 2023 tax year, they are able to contribute $600 to their traditional IRA and $800 to their employer-sponsored 401(k) retirement plan. This means that this individual is eligible for a non-refundable tax credit of $700 [($800 + $600 = $1,400) × 50%].
It is also essential to understand the ways in which claiming a saver’s tax credit when contributing to a retirement plan can reduce an individual’s income tax burden. First, an individual’s contribution to their retirement plan can qualify as a tax deduction. This is an added bonus as the saver’s tax credit can essentially reduce the amount of actual taxes owed to the IRS, dollar for dollar.
Consider the following example: A married individual earns $38,000 in 2023. That year, they contributed $1,000 to their IRA, while their unemployed partner generated zero earnings. After deducting their IRA contribution, the AGI shown on the joint return was $37,000. In this case, the married individual was entitled to claim a 50% credit of $500 for that IRA contribution.
In order to receive this saver’s tax credit, taxpayers who contribute to their qualified employer-sponsored retirement plans must complete an IRS Form 8880. Taxpayers whose income did not exceed the prescribed amount for their tax filing status can use this form to report the income of their total contributions. This is suitable for both single and married filing statuses.
The contributed amount that does exceed the allowable limit must be divested from the employer-sponsored retirement account within a given time frame. This returned portion of the contribution would not be eligible for the saver’s credit. Likewise, if an individual were to change jobs frequently and consequently roll over their money from one employer-sponsored retirement account into another, such as a 401(k) to a traditional IRA, then that contribution is similarly ineligible for the saver’s tax credit.
If families and individuals are able to follow the listed rules, then they can enjoy a substantial saver’s tax credit that can allow them to save and invest additional funds each year in order to achieve their financial and retirement goals faster with less effort.
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