The Retirement Savings Contributions Credit (Saver’s Credit) is a tax credit designed to incentivize retirement savings. Taxpayers with income below a certain level can take advantage of it by contributing to a qualified retirement plan (such as a Traditional IRA, Roth IRA, 401k/403b, or 457).
You’re eligible for the credit if you’re:
- Age 18 or older with earned income,
- Not claimed as a dependent on another person’s return, and
- Not a student.
2020 Saver’s Credit
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $39,000||AGI not more than $29,250||AGI not more than $19,500|
|20% of your contribution||$39,001 – $42,500||$29,250 – $31,875||$19,501 – $21,250|
|10% of your contribution||$42,501 – $65,000||$31,876 – $48,750||$21,251 – $32,500|
|0% of your contribution||more than $65,000||more than $48,750||more than $32,500|
Contributions to individual retirement accounts (IRAs; such as Traditional and Roth IRAs) for a specific year can be made up until the tax deadline (usually April 15th of the following year). This lag can be used to optimize financial strategy.
To see if you received the credit, it can be found on the following lines of each tax return form:
2017 1040: Line 51
2017 1040A: Line 34
2018 1040: Line 12b (from Schedule 3)
2019 1040: Line 13b (from Schedule 3)
2019 1040-SR: Line 13b (from Schedule 3)
All 1040-NR‘s: Line 48
If you did not receive it and you should have, you can amend your return with a 1040X.
Come tax filing time, Person A had AGI of $30,000 in 2020 and decided to contribute $2,000 to a Roth IRA. They have a filing status of single, so the amount they get for the Saver’s Credit is $200 (10% x $2,000).
Captain Case Study
In helping a single mother with comprehensive financial planning, I realized her tax preparer (whom she paid over $300 to do her taxes) missed a great opportunity for her for the 2019 tax year.
Her AGI for the year was about $30,500 and she filed as “Head of Household”. She is over age 59.5 and made no contributions to any retirement accounts in 2019. She had a sufficient emergency fund and no high-interest debt (anything with interest rates over 4%). With a simple $2,000 contribution to a Traditional IRA, she could lower her AGI to about $28,500, which would allow her to get a $1,000 tax credit (50% x $2,000), which is precisely what we did. We set up a Traditional IRA with Charles Schwab, had her contribute $2,000 to it, then amended her tax return with a 1040-X reflecting the change and the newly acquired Saver’s Credit. All of which I helped with for free.
$1,000 tax credit (essentially an immediate 50% return on her $2,000 IRA contribution, which she can take out at anytime because she is over 59.5 years old)