The Retirement Savings Tax Credit

Note: The figures on this page refer to the 2022 tax year. The dollar amounts will be adjusted for inflation in later years.

The Retirement Savings Tax Credit, or Saver’s Credit, is very useful to people trying to stay below the tax line. If you have an Adjusted Gross Income under $68,000 you may qualify for this tax credit if you put money into a retirement savings account such as a 401k or an IRA.

Here are some important facts about the Retirement Savings Credit:

• It is a non-refundable tax credit — A “tax credit” is subtracted from the tax you would otherwise owe. So if you would have owed $600 but you get a $400 tax credit then you only end up owing $200. It’s “non-refundable,” which means that if you would have owed $600 but you get a $1,000 tax credit, you end up owing nothing but you don’t get a $400 refund.
• It decreases as Adjusted Gross Income rises — You can only get this credit at all if your Adjusted Gross Income is below $68,000 (less if you are filing as single, head of household, or married filing separately). The credit is most powerful if your Adjusted Gross Income is below an even lower threshold (which also depends on your filing status).
• The credit is based on how much money you contribute to a retirement account, up to $2,000 — The more money you contribute, the more credit you get, until you’ve contributed $2,000 at which point the credit maxes out. (Starting in tax year 2018, you can also get the credit for contributing to an ABLE account, which is a Roth-IRA-like savings vehicle meant for some individuals with disabilities and their families.)
• You can use this credit even after the tax year is over — As long as you put the money in your retirement account before the tax filing deadline (usually April 15^th) you can claim this credit on the previous year’s tax form. In other words, you can file your taxes in February, claim the credit, and get a refund, and then turn around and deposit that refund into an IRA in order to take the credit — completely legally and by-the-book.
• You can’t take the credit if you’re a full-time student or are claimed as a dependent on someone else’s tax form.
• You can take this credit and the deduction if you contributed to a tax-deferred retirement account — if you contributed to a traditional IRA, a 401k, or another such tax-deferred retirement account, you can deduct this contribution from your income. You get to take this deduction even if you also apply for the Retirement Savings Credit.
• Withdrawals from retirement accounts may make you ineligible — if you have taken money out of a tax advantaged retirement account in recent years, or plan to do so before the tax filing deadline next year, you may be ineligible for the credit this year.
• Fill out Form 8880 to apply for this credit — On the 2021 set of tax forms, you enter this credit on line 4 of Schedule 3, and you use Form 8880 to calculate it.

To figure your credit, you take the amount of money you’ve contributed to a valid retirement account (such as a traditional IRA, a Roth IRA, or a 401k) — up to $2,000 — and multiply it by a value that depends on your Adjusted Gross Income and your filing status. The following table shows those values:

So, for instance, if you file as “Head of household” and your Adjusted Gross Income is $25,000 and you put $2,000 into an IRA then your Retirement Savings Tax Credit is $2,000 × 0.5 = $1,000.