Retirement saver’s tax credit an often-overlooked tool

Dear Savvy Senior: Can you explain to me how the retirement saver’s tax credit works? My wife and I are in our 50s and are looking for creative ways to boost our retirement savings beyond our 401(k). Is this something we may be eligible for? — Struggling to Save

Dear Struggling: If your income is low to moderate and you participate in your employer-sponsored retirement plan or an IRA, the retirement savings contribution credit (aka “saver’s credit”) is a frequently overlooked tool that can help boost your nest egg. Here’s how it works:

If you contribute to a retirement savings account such as a traditional or Roth IRA, 401(k), 403(b), 457, thrift savings plan, simplified employee pension or SIMPLE plan, the saver’s credit will allow you to claim 10, 20 or 50 percent of your contribution of up to $4,000 per year for couples or $2,000 for singles.

Keep in mind that a credit is not the same as a tax deduction — it’s better: While a tax deduction just reduces the amount of your income that is subject to taxes, a tax credit reduces your actual tax bill dollar for dollar.

To qualify, you must be at least 18 years old, not a full-time student and not claimed as a dependent on someone else’s tax return. Your adjusted gross income in 2023 must be $73,000 or less as a married couple filing jointly, $54,750 or less if filing as head of household, or $36,500 as a single filer. These income limits are adjusted annually.

To get the 50 percent credit, you’ll need an income below $43,500 for married couples filing jointly, $32,625 if filing as head of household and $21,750 if filing individually.

The 20 percent credit rate applies to couples earning $43,501 to $47,500, head of household filers earning $32,626 to $35,625 and individuals earning $21,751 to $23,750.

And the 10 percent rate is for couples with an adjusted gross income of $47,501 to $73,000; $35,626 to $54,750 for head of household filers and $23,751 to $36,500 for individuals.

Here’s an example of how this works. Let’s say that you and your wife earned $75,000 in 2023. Over the course of the year, you contributed $4,000 to your employer’s 401(k) plan. After deducting your 401(k) contribution, your adjusted gross income on your joint return is $71,000. Since your AGI puts you in the 10 percent credit bracket, and you’ve contributed the $4,000 maximum that can be considered for the credit, you are entitled to a $400 saver’s credit on your tax return.

It’s also worth mentioning that the saver’s credit is in addition to any other tax benefits you get for your retirement contributions. So, in the previous example, not only would you be entitled to a $400 credit, but you would be able to exclude the $4,000 401(k) contribution from your taxable income. So if you’re in the 12 percent tax bracket, this translates to an additional $480 in savings, for a total of $880.

How to claim

To claim the saver’s credit, you must fill out form 8880 (see IRS.gov) and attach it to your form 1040 or 1040NR when you file your taxes.

For more information on the saver’s credit, see IRS publication 590-A, “Contributions to Individual Retirement Arrangements.”

The IRS also offers an online quiz to help determine if you qualify for the saver’s credit. To access it go to IRS.gov/Help/ITA and click on “Do I Qualify for the Retirement Savings Contributions Credit?”

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org.