Saving money in a retirement account not only builds your financial “nest egg” for the future, it can also pay off sooner in the form of a tax credit! The retirement savings contribution credit (a.k.a. the Saver’s Tax Credit) allows taxpayers to claim a tax credit up to 50% of their retirement plan contributions depending on their adjusted gross income (AGI).
Eligibility and AGI
To be eligible, you simple need to be 18 years or older, not a full time student, and not be claimed as a dependent on another person’s income tax return. Contributions to eligible retirement accounts such as IRAs and 401ks will determine the amount of credit you can claim. The amount of the saver’s credit you may be eligible for also depends on your adjusted gross income. In short, your AGI is figured out from your gross income minus any adjustments such as student loan interest deductions and the contributions you made to a retirement account. Check out our article on the federal income tax formula for more information on AGI.
Give Yourself Some (Saving) Credit
Up to 50% of what you contribute to a qualified retirement and gradually gets phased out based on certain AGI brackets and your filing status. For 2020, the brackets currently are:
| Credit % | Married, Filing Jointly | Head of Household | Single, Married filing separately |
| 50% of retirement contributions | No more than $39,000 AGI | No more than $29,250 AGI | No more than $19,500 AGI |
| 20% of retirement contributions | AGI between $39,001-$42,500 | AGI between $29,250-$31,875 | AGI between $19,501-$21,250 |
| 10% of retirement contributions | AGI between $42,501 – $65,000 | AGI between $31.876-$48,750 | AGI between $21,251-$32,500 |
| 0% of retirement contributions | AGI more than $65,000 | AGI more than $48,750 | AGI more than $32,500 |
Let’s take an example:
Jack & Diane are a newly married couple. They will file their return jointly and calculate their AGI is $55,000. Jack has a 401k from his job that he contributed $3000 in the past year. Based on their filing status and AGI, Jack & Diane can claim a Saver’s Tax Credit of $300 ($3000 x 10%).
One more thing to add, as a tax credit, this is a dollar-for-dollar reduction of what you may owe in taxes. So it is definitely worth claiming if you happen to qualify.
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