The Tax Credit You Might Be Missing Out On If You Have A Retirement Fund

Retirement funds are designed to help you in the future, but there is a way they can help you now that you may not know about. Believe it or not, the IRS wants you to save for retirement. In fact, the government is so concerned with American's futures that the U.S. Census Bureau even looks into it with its Survey of Income and Program Participation (SIPP) that looks at things like how people are preparing for retirement. To help American taxpayers realize the importance of putting money away for the future, the IRS offers a credit to encourage you to do just that: the Retirement Savings Contributions Credit, more commonly known as the Saver's Credit. This credit not only encourages saving for retirement but also rewards taxpayers for doing it. 

With only 54.4% of American households utilizing a dedicated retirement account to save for the future, the government is understandably concerned, especially when the average Social Security benefit in 2024 was only $1,920 per month. There are plenty of tax credits you can take advantage of (for example, did you know that you can get a tax credit if you bought an EV?), and they are a great way to make the pinch of doing your taxes a lot less painful by reducing the amount you owe each year. The key with the Saver's Credit is to make contributions to a qualified retirement account, like an IRA, 401(k), or 403(b) — and to make sure you don't forget to claim it when you file your annual taxes.

The Saver's Credit was first enacted in 2001 when the government created it as a way to help match the contributions Americans make toward their retirement accounts, thus encouraging lower- and moderate-income households the opportunity to improve their future financial well-being. The amount of the credit will vary between 10% and 50% of your total contribution amount depending on the amount of the Adjusted Gross Income (AGI) you report on Form 1040 when you fill out your tax return.

In order to qualify for a 50% credit, your AGI for the filing year 2024 can't exceed $46,000 for a couple filing a joint return, $34,500 for someone filing as head of household, and $23,000 for all other filers (which the IRS defines as single, married but filing separately, and qualified widow(er)s. If your AGI ranges from $46,001 to $50,000 for a joint filing, $34,001 to $37,500 for a head of household, and $23,001 to $25,000 for all other filers, the credit drops to 20%. It drops to 10% for joint filers with an AGI of $50,001 to $76,500, $37,501 to $57,375 for heads of household, and $25,001 to $38,250.

Eligible accounts for this credit include both traditional and Roth IRAs, along with $01(k), 403(b), and 457(b) plans, but rollover contributions won't count toward the Saver's Credit. If you contribute to one of these accounts and meet the eligibility requirements, it would be a mistake to ignore the credit available to you.

The IRS doesn't make this credit available to everyone, so it is important to know what the requirements are in order to receive it — the IRS may want you to save for retirement, but it won't take the time to notify you if you've missed an opportunity to get credit for doing it. Because it is designed specifically to benefit low-to-moderate earners and the amount of the credit is determined by the amount of your contributions, your AGI and your filing status, you won't be able to qualify for this credit if your income is too high — specifically a married couple with an AGI over $76,500, a head of household with more than $57,375, and all other filers over $38,250.

Similarly, individuals who are claimed as dependents on someone else's taxes are not able to claim this credit, even if they contribute to their own retirement savings account. Students and those under the age of 18 are also not eligible for the Saver's Credit. Anyone looking to claim this credit on their taxes will simply need to complete the IRS Form 8880 and submit it along with their tax returns. The form is not only required to claim the credit but also help you calculate the amount of credit you are eligible for based on the amount of your AGI and your filing status.