Saving for retirement is one of the most valuable things you can do in your financial planning. But it's also hard to do. If your income is low, it's hard enough just to cover basic living expenses for here and now, let alone worrying about what will happen well into the future.
However, lawmakers know how hard it is for low-income Americans to be financially secure, and so they've offered some help through the tax laws. The Retirement Savings Contributions Credit is a tax break that's available to many people with modest incomes, offering a way for savers to make their money work harder for them. Better known as the Saver's Credit, this provision is designed to give you a boost even if you can only save modest amounts toward retirement.
The basics of the Saver's Credit
The Saver's Credit is available to those taxpayers who make contributions to retirement accounts during the year. That includes money that you contribute to an IRA on your own, as well as anything you have diverted from your paycheck to go toward an employer-provided plan at work, such as a 401(k) or 403(b) plan. Up to $2,000 in contributions can count toward the credit, with different taxpayers qualifying for different percentage credits depending on their income and filing status.
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There are also some other requirements to claim the credit. Only those 18 or older who aren't full-time students can receive the credit, and you must not be claimed as a dependent on anyone else's tax return. In practical terms, those requirements highlight the intent of the tax break to help those who are responsible for supporting themselves financially.
The IRS also sets income limits for eligibility for the Saver's Credit each year. Those numbers typically rise along with inflation, pushing the various threshold income levels slightly higher from year to year.
2020 income limits and credit amounts
The Saver's Credit pays between 10% and 50% of the first $2,000 in contributions you make. The chart below shows the percentages that apply for calculating the credit depending on what your filing status and income levels are.
|
Credit Percentage |
Single or Married Separate |
Head of Household |
Married Joint |
|---|---|---|---|
|
50% of contribution |
$0 to $19,500 |
$0 to $29,250 |
$0 to $39,000 |
|
20% of contribution |
$19,501 to $21,250 |
$29,251 to $31,875 |
$39,001 to $42,500 |
|
10% of contribution |
$21,251 to $32,500 |
$31,876 to $48,750 |
$42,501 to $65,000 |
Data source: IRS.
As an example, say you're married filing a joint return and contribute $1,000 to a retirement account. If your income was $50,000, then you'd be in the 10% range, so your credit would be $1,000 times 10% or $100. A similar couple with income of $35,000 would get a larger 50% credit, adding up to $500.
If you're married, retirement contributions from each spouse are eligible for the credit. So to max out the credit, each spouse would save $2,000. If their income qualified them for the 50% credit amount, then each would get $1,000, for a total family tax savings of $2,000.
Encouraging people to save
Lawmakers intended the Saver's Credit to give an added boost to those saving for retirement. IRAs and 401(k)s still offer their normal perks, including immediate tax deductions for traditional IRA and 401(k) contributions and tax-free growth for Roth IRA and Roth 401(k) accounts. Yet some low-income families don't get much immediate benefit from the ordinary tax benefits of retirement accounts. That makes the Saver's Credit an extra incentive to save.
When you don't have much income, it's hard to save. The Saver's Credit can match your retirement saving efforts, making your money work harder for you by matching it with federal funds. Even if you can't save much, the Saver's Credit can make it easier to reach your financial goals.
