If you've been debating about contributing to your Roth IRA, this incentive may make your decision a bit easier: a Saver's Credit. Formally called the Retirement Savings Contributions Credit, this perk was designed to encourage more low- to middle-income taxpayers to stash cash away in qualified retirement accounts.  

The Saver's Credit is probably one of the biggest secrets in the retirement world. Most people who qualify for this credit have no idea that it exists, leaving up to $2,000 of free money on the table every year. 

Let's dive into how the Saver's Credit works and determine if you qualify so that you're not deprived of this hidden gem. This could be the key to turning your Roth IRA into a money-saving tax break. 

Tax credit notebook next to calculator and money.

Image source: Getty Images.

Earn money when you save for retirement

Stashing away a chunk of your income in a retirement account may not be the most glamorous way to allocate your funds. But a Roth IRA comes with built-in benefits that make this attractive now and later. 

First, the Roth IRA is one of the retirement accounts that could qualify you for the Saver's Credit when you file your taxes. By contributing to a Roth IRA, you can earn a nonrefundable tax credit that lowers or eliminates your tax bill.  

The good news is that you are not required to contribute a certain amount of money to qualify for this credit. But the more money you contribute, the bigger your potential credit becomes. You could be eligible for a credit that is worth 10%, 20%, or 50% of your annual contribution, up to a maximum of $1,000 for single filers and $2,000 for married couples filing jointly. However, there is a ceiling for IRA contributions. For 2021, you can't contribute more than $6,000 if you're under 50 and $7,000 if you're 50 and over. 

Most people try to put aside as much money as possible in a Roth IRA because the benefits are too good to pass up. You can contribute money you've already paid taxes on, invest in assets that grow your portfolio, and withdraw your money 100% tax-free during retirement. 

Determining if you are eligible 

Not everyone has access to the Saver's Credit that allows you to decrease your tax tab. To qualify, you must contribute money to your Roth IRA for the year you are filing your tax return, and check the boxes on the requirements below. 

  • You cannot be a full-time student. 
  • You cannot be under 18. 
  • You cannot be claimed as a dependent on someone else's tax return. 
  • You cannot exceed the income thresholds for your filing status. 

The income thresholds deserve an explanation. Since this credit was designed for taxpayers on the lower end of the income scale, there are limitations to consider. Take a look at the adjusted gross income (AGI) thresholds for your filing status to determine if you are eligible for a 10%, 20%, or 50% credit. 

2021 Saver's Credit rate and AGI limits by filing status


Married Filing Jointly AGI Limits 

Head of Household AGI Limits

All Other Filers AGI Limits

50% of your contribution 

$0 to $39,500

$0 to $29,625

$0 to $19,750

20% of your contribution 

$39,501 to $43,000

$29,626 to $32,250

$19,751 to $21,500

10% of your contribution

$43,001 to $66,000

$32,251 to $49,500

$21,501 to $33,000

Not available 

Over $66,000

Over $49,500

Over $33,000

Data source: IRS. 

The Saver's Credit in action 

Let's say you're a single filer who earned $19,000 for the year. Most of your earnings consisted of brand ambassador work that was not taxed throughout the year so you're stuck with a $1,000 tax bill. Instead of worrying about how you're going to pay that off, the Saver's Credit could be added to your tax return to save the day.

If you contribute $2,000 to the Roth IRA, you would be eligible for a 50% credit that is worth $1,000. When you apply the credit to your tax return, you wipe away your tax bill.

Don't miss out on this benefit 

If you qualify, the Saver's Credit is an opportunity that you want to jump on -- especially if you expect to owe taxes. 

What's even better is understanding the impact of this tax credit over time. If you're married and earn a $2,000 credit for 40 years, that's $80,000 of free money you've earned just for saving toward retirement!