What You Need to Know about the Saver’s Credit

July 11, 2012

Thanks to the IRS’s Saver’s Credit, you may now be able to take advantage of a tax credit to help you save for retirement. Formerly known as the Retirement Savings Contributions Credit, the Saver’s Credit
applies to individuals with the following filing status/income combinations:

  • Single, married filing separately, or qualifying widow(er), with income up to $27,750
  • Head of household with income up to $41,625
  • Married filing jointly, with incomes up to $55,0000

If you make contributions to a qualified IRA, 401(k) or certain other retirement plans, you can take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount.

You are required to file Form 8880 with your Form 1040 individual income tax return to claim the Saver’s Credit.

The Saver’s Credit is in addition to other tax benefits which may result from retirement contributions. For example, most workers can deduct their contributions to a traditional IRA. However, it’s important to remember that Roth IRA contributions are not deductible. Contributions to 401(k)s and similar
workplace retirement savings plans are not taxed until withdrawn.

There are several other important rules that apply to take advantage of the Saver’s Credit:

  • Eligible taxpayers must be at least 18 years of age
  • Anyone claimed as a dependent on someone else’s return cannot take the credit
  • A student cannot take the credit.
  • Some retirement plan distributions will reduce the contribution amount used to determine the amount of the credit.

Initiated in 2002, the Saver’s Credit was made part of the permanent tax code in legislation enacted in 2006. Income limits, for the sake of preserving the value of the credit, are now adjusted annually to keep pace with inflation.

To learn more about the Saver’s Credit or other aspects of saving for retirement, contact the professional team at Wallace & Associates.