Financial experts recommend saving a lot of money for retirement. By one rule of thumb, you should have twice your salary saved by the time you’re 40, and eight times your salary by the time you’re 65. Unfortunately, the average American paces well behind that recommendation, and half of all Americans have no retirement savings at all. To incentivize low- and moderate-income Americans to save more, the U.S. government created the Saver’s Credit. This credit provides a tax deduction for some of your IRA or ABLE account contributions, as long your income falls below a certain threshold.
What’s the Saver’s Credit, and How Much Is It Worth?
The federal government created the Saver’s Credit (originally the Retirement Savings Contributions Credit) in the early 2000s. It’s already possible to deduct contributions that you make to a traditional IRA, but this credit provides even greater incentive. In particular, it is designed to help low- and moderate-income individuals save for retirement.
The Saver’s Credit is worth up to $2,000 ($4,000 if filing jointly). There are three tiers to the credit and exactly how much you earn depends on your filing status and adjusted gross income. The tiers are worth 10%, 20% or 50% of your contributions.
For instance, if you’re a single filer, your income qualifies you for the 50% credit tier and you contribute $3,000 to an IRA, you will receive a credit of $1,500. You can achieve the maximum credit by saving $4,000, which will get you a credit of $2,000. (That’s the maximum credit, so contributions of more than $4,000 will still get you a $2,000 credit). The math is generally quite simple for the Saver’s Credit. You don’t need additional worksheets or calculators as with some other credits.
Remember that tax credits are not the same as deductions; while a deduction lowers your tax bill by reducing your taxable income, a credit directly reduces your tax bill. Another thing to note is that the Saver’s credit is not refundable. So if the credit pushes your tax liability (how much you owe in taxes for the year) below zero, you will not get a refund for the difference. You will simply have no tax liability.
2019 Saver’s Credit: Eligibility Income Tiers
The income thresholds for the credit change each year to keep pace with inflation. You can find the income limits for the current tax year in the table below.
|2019 Saver’s Credit Income Limits|
|Credit Amount||Single||Head of Household||Joint Filers|
|50% of contribution||AGI of $19,250 or less||AGI of $28,875 or less||AGI of $38,500 or less|
|20% of contribution||$19,251 – $20,750||$28,876 – $31,125||$38,501 – $41,500|
|10% of contribution||$20,751 – $32,000||$31,126 – $48,000||$41,501 – $64,000|
|0% of contribution||more than $32,000||more than $48,000||more than $64,000|
Besides falling into one of these income tiers, you’ll also need to meet the following requirements to qualify for the credit:
- You are age 18 or older.
- You’re not a full-time student.
- No one claims you as a dependent on their return.
You also need to make contributions to either a traditional IRA, Roth IRA, SIMPLE IRA, SARSEP, 401(k), 403(b), 501(c)(18), 457(b) plan or ABLE account. Rollover contributions do not qualify.
IRAs also have a contribution limit. The limit for 2019 is $6,000. You can also contribute an extra $1,000 if you are 50 or older. So if you’re looking to get the full Saver’s Credit, you do not need to make the maximum contribution to a retirement account. Making a contribution of just $4,000 could get you the full credit. Still, the other benefits of maxing out the IRA limit – tax savings and retirement readiness – make it a good idea if you can afford it.
Starting with 2018, ABLE accounts have a contribution limit of $15,000.
The Saver’s Credit is a great way for low- and moderate-income individuals or couples to save for retirement while also saving money on their taxes. The credit is worth a maximum of $2,000 ($4,000 if you file jointly) and there are three tiers of the credit. Filers at the lowest income level qualify to receive a credit worth up to 50% of their contributions to a retirement account. As your income increases, the credit for which you qualify is smaller, providing a credit of either 20% or 10% of your contributions.
Saving More for Retirement
- Ready to start saving for retirement? You can open an IRA at one of these online brokerages and start saving and investing today. And if you’re unsure how to invest, start by figuring out your risk tolerance and target asset allocation.
- Navigating investment options and different varieties of retirement accounts can get confusing. That’s why many choose to work with a financial advisor who can manage their money and investments on their behalf. You can find an advisor today with SmartAsset’s free financial advisor matching service. Just answer some questions about your financial situation and the online tool will match you with up to three advisors right in your area.
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