Are You Taking Advantage of the Retirement Saver’s Credit?

If you’re like many Americans, you might find saving for retirement to be a challenge. More immediate needs – like paying off debt or saving for a short-term goal like buying a new car – often take priority over putting money in a 401(k) plan at work or investing in another type of retirement account.

What if there was an extra incentive to save for retirement? Say, getting a dollar-for-dollar reduction on your tax bill this year? Would this encourage you to put more away for your golden years?

This incentive does exist. It’s called the Retirement Savings Contribution Credit, or the "Saver’s Credit" for short. This valuable federal income tax credit became effective in 2002 to help mid- and low-income taxpayers save more for retirement by giving them a special tax break.

If you qualify for the Saver’s Credit, you can receive all the important tax advantages of investing in an employer-sponsored retirement plan or IRA, plus the added benefit of a federal income tax credit. This tax credit can reduce – and in some cases even eliminate – your overall tax amount owed.

Here’s what you need to know about the Saver’s Credit and how it works.

Who Is Eligible?

Those eligible for the Saver’s Credit are:

• 18 years of age or older at the close of the tax year
• Not a full-time student for five calendar months or more (not necessarily consecutive) during the tax year
• Not being claimed as a dependent on another person’s tax return

 

To be eligible, your modified Adjusted Gross Income (AGI) cannot exceed the maximum modified AGI caps for the year (as adjusted for inflation). The modified AGI caps for tax year 2024 are:

• $38,250 for single filers, married individuals filing separately, and qualifying widow(er)s
• $57,375 for heads of household
• $76,500 for married couples filing jointly¹.

 

Which Retirement Accounts Are Eligible?

In general, eligible contributions to the following types of retirement and savings plans and accounts currently qualify for the Saver’s Credit:

• 401(k) plan
• Traditional IRA
• Roth IRA
• SIMPLE plan
• SARSEP plan
• 403(b) plan
• 501(c)(18)(D) plan
• Governmental 457(b) plan
• Qualified retirement plan, including the federal Thrift Savings Plan
• ABLE account for which you are the designated beneficiary.

 

Eligible contributions must be "new" money, meaning rollovers from an existing account – such as a 401(k) rollover into an IRA – won’t qualify for the Saver’s Credit. The following are generally considered eligible contributions: regular annual contributions to a traditional or Roth IRA; elective deferrals (traditional or Roth) to 401(k), 403(b), governmental  457(b), SAR-SEP or SIMPLE IRA plans; voluntary after-tax employee contributions to a qualified retirement plan; contributions to a 501(c)(18)(D) plan; and contributions to an ABLE account of which the taxpayer is the designated beneficiary.  

[Note that the Saver’s Credit will not be available for ABLE accounts after 2025, and the Saver’s Credit will be replaced by a "Saver’s Match" in 2027.]

How Much Is the Saver’s Credit Worth?

The maximum annual credit any eligible single filing taxpayer can receive is $1,000²; the credit amount can be doubled if the eligible taxpayer is married and filing jointly, and both spouses contribute to retirement plans.³ What’s great about the Saver’s Credit is that it is an actual federal income tax credit, not merely a federal income tax deduction.

What’s the difference? A federal income tax deduction simply subtracts the value from your taxable income and you pay federal income taxes on the remaining taxable income. A federal income tax credit, on the other hand, reduces your actual federal income tax liability dollar-for-dollar. This makes it more valuable.

It’s important to note that the Saver’s Credit is considered "non-refundable," which means it can only be subtracted from the federal income taxes you owe – possibly down to zero – but it won’t provide you with a tax refund.

How Do You Calculate the Saver’s Credit?

The value of the Saver’s Credit is calculated based on your eligible contributions to an eligible plan and/or account. The amount of the credit is 50%, 20% or 10% of your eligible contributions, depending on your modified AGI and filing status (reported on your Form 1040 series return). The maximum annual contribution eligible for the credit is $2,000 ($4,000 if married filing jointly⁴). For this purpose, contribution amounts are generally reduced by certain distributions from your eligible plan and/or accounts.

Saver’s Credit: An Example

Let’s say you have a modified AGI of $30,000 as a single filer in 2024 and you contribute $1,500 to an eligible retirement account. The value of your Saver’s Credit would be $150 (10% of $1,500). If you managed to contribute $2,500 to an eligible retirement account, your credit would be worth $200, due to the $2,000 cap on contributions.

Remember that if your eligible contribution was made to a 401(k) plan, traditional IRA or other account that offers a pre-tax contributions or a federal income tax deduction for contributions, your taxable income is already reduced by the amount of your contribution. As a result, your total tax savings may be even greater than the value of the Saver’s Credit.

How to Claim Your Saver’s Credit

To take advantage of the Saver’s Credit for 2024, you’ll need to attach IRS Form 8880, "Credit for Qualified Retirement Savings Contributions" to your IRS Form 1040 and report the credit on Schedule 3 of the Form 1040.  It’s a good idea to work with a tax professional to make sure you are not only eligible for the credit but that you use the appropriate forms for each tax year. 

The Bottom Line

The underlying goal of the Retirement Savings Contribution Credit is to encourage mid- and low-income taxpayers to save more for retirement. If you didn’t contribute to a traditional workplace retirement plan or IRA in prior years, now may be a good time to start. Your money may have tax-deferred growth potential, you may reduce your taxable income for the year, and you may even be able to qualify for the Saver’s Credit. Taken together, these potential benefits can provide compelling opportunities as you build an important nest egg for your future. As always, you should consult with a legal and tax advisor about your specific situation.

Footnotes:

¹ IRS, “Retirement Savings Contributions Credit (Saver’s Credit),” available at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-credit-savers-credit. Accessed December 31, 2024.

² Note that only taxpayers eligible specifically for the 50% credit rate (described above) and who contribute at least $2,000 to their retirement account are entitled to the maximum $1,000 credit.

³ For the couple to receive the maximum $2,000 credit, the couple would need to be eligible specifically for the 50% credit rate (described above) and each spouse would need to contribute at least $2,000 to his or her own retirement account.

⁴ Ibid.