Saver’s Credit Can Help You Save for Retirement

Article Highlights:

  • Benefits
  • Eligible Taxpayers
  • Rules for Students, Dependents of Others and Individuals Under the Age of 18
  • Due Date for Contributions

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit.

The saver’s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans.

Credits for 2020 and 2021 are determined from the tables shown below and are based upon both filing status and income (AGI).

Modified Adjusted Gross Income*  



Joint Return Head of Household Others
Over Not Over Over Not Over Over Not Over
$         0 $39,000 $         0 $29,250 $         0 $19,500 50
39,000 42,500 29,250 31,875 19,500 21,250 20
42,500 65,000 31,875 48,750 21,250 32,500 10
65,000   48,750   32,500   0


Modified Adjusted Gross Income*  



Joint Return Head of Household Others
Over Not Over Over Not Over Over Not Over
$         0 39,500 $         0 29,625 $         0 19,750 50
39,500 43,000 29,625 32,250 19,750 21,500 20
43,000 66,000 32,250 49,500 21,500 33,000 10
66,000   49,500   33,000   0


* Modified AGI is determined without regard to the foreign earned income exclusion (also applies to US possessions) and foreign housing exclusion or deduction.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples if both spouses contribute to a plan), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, and may in fact be zero for some taxpayers.

The amount of a taxpayer’s saver’s credit is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs.

Example – Eric and Heather, ages 32 and 30, are married and filing a joint return. In 2020, Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for 2020 was $40,000.  The credit is computed as follows:

   Eric’s 401(k) contribution was $3,000, but only the first $2,000 can be used           $2,000

   Heather’s IRA contribution was $500, so it can all be used…………………………….              500

   Total qualifying contributions……………………………………………………………………………           $2,500

   Credit percentage for a joint return with AGI of $40,000 from the table……….            X.20 

   Saver’s credit…………………………………………………………………………………………………..          $500

This example illustrates how the credit phases out for higher-AGI taxpayers. In this example, the couple’s AGI of $40,000 limits the credit to 20% of their qualifying contributions. Had their AGI been $39,500 or less, their credit percentage would have been 50% of their qualified contributions, for a credit of $1,250.  

The saver’s credit supplements the other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers’ contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So, in addition to the saver’s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which lowers an individual’s tax before the credit is applied. The credit itself can only be used to reduce taxes (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer’s tax liability is lost.

Other special rules that apply to the saver’s credit include the following:

  • 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 full-time student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a full-time student.

The credit is provided to encourage taxpayers to save for retirement. To prevent taxpayers from taking distributions from existing retirement savings and re-depositing them to claim the credit, qualifying retirement contributions used to figure the credit are reduced by any retirement plan distributions taken during a “testing period.” The testing period includes the prior two tax years, the current year, and the subsequent tax year before the due date (including extensions) for filing the taxpayer’s return for the tax year of the credit.

As you can see, qualifying for and using this credit involves following a complicated set of rules, but the credit can be very beneficial. If you are not sure you can afford to fund your retirement plan, contributions to an IRA or a self-employed retirement plan (SEP) can be made after the close of the year, allowing you time to determine the tax benefit of the saver’s credit and your overall tax refund before you make a contribution to one of those plans. For example, IRA contributions for 2020 can be made up to April 15, 2021, while SEP contributions can be made until October 15, 2021 if your return is on extension.

If you have questions about how this tax benefit might apply in your situation, please give this office a call.