What is the Saver’s Credit and how do you get it?

Young couple holding a piggy bank where they plan to stash the money they save with the Saver's Credit tax credit on their federal income taxes.Image: Young couple holding a piggy bank where they plan to stash the money they save with the Saver's Credit tax credit on their federal income taxes.

In a Nutshell

Are you saving for retirement with a 401(k) or individual retirement account? If so, you may be able to “double dip.” If you qualify, you could claim a credit for your retirement savings — on top of the tax deduction you already get for qualified contributions.
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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It article has been updated for the 2020 tax year.

The less money you make, the harder it is to save for retirement.

When you’re having trouble stretching your paycheck to cover immediate costs like housing, food and transportation every month, saving for something that’s decades away may seem like less of a priority. However, you might be eligible for a federal income tax credit that could give you some extra benefit from your retirement savings right now.

You might already get a tax deduction for your contributions to a 401(k) or IRA, but the Retirement Savings Contribution Credit (commonly known as the Saver’s Credit) can also reduce your tax bill by up to $2,000 ($4,000 for a married couple filing jointly) if you qualify.

What is the Saver’s Credit and are you eligible for it? Let’s look at what you should know about this valuable tax credit.

Who is eligible for the Saver’s Credit?

The Saver’s Credit is designed to give low- to moderate-income taxpayers an additional incentive to save for retirement.

To be eligible, you must meet all of the following requirements:

  • Be 18 or older
  • Not be a full-time student
  • Not be claimed as a dependent on another person’s return
  • Meet the limits for adjusted gross income, also known as AGI

For the purposes of this credit, you are considered a full-time student for the year if during any part of five calendar months of the tax year you were enrolled as a full-time student at a school or took a full-time on-farm training course given by a school or a state, county or local government agency.

You also need to contribute to a qualified retirement plan, such as a traditional or Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18), or a governmental 457(b) plan.

The Saver’s Credit in 2020

Credit rate

Married Filing Jointly

Head of Household

Single, Married Filing Separately or Qualifying Widow(er)

50% of your contribution

AGI not more than $39,000

AGI not more than $29,250

AGI not more than $19,500

20% of your contribution

$39,001 – $42,500

$29,251 – $31,875

$19,501 – $21,250

10% of your contribution

$42,501 – $65,000

$31,876 – $48,750

$21,251 – $32,500

No credit available

more than $65,000

more than $48,750

more than $32,500

Source: IRS.gov

For the 2020 tax year, you won’t be able to claim the Saver’s Credit if you’re married filing jointly and your AGI is more than $65,000, more than $48,750 for heads of household and more than $32,500 for all other filers.

Here’s an example of how the credit could work for your federal income taxes.

Your filing status is single and you have an AGI of up to $18,750. During the tax year, you managed to put $1,000 into your employer-sponsored 401(k). (Nice work!) Your AGI is reduced by that $1,000 contribution, so you could qualify for a Saver’s Credit of 50% of what you contributed — in this case, $500. If you’d been able to contribute $2,000 or more to your 401(k), you could have qualified for a $1,000 credit, since the credit applies to the first $2,000 you contribute.

Here’s another example. A married couple who files a joint return has combined income of $40,000. Each spouse contributes $2,000 to their 401(k) plan, which reduces their AGI to $36,000. That reduction in AGI entitles them to take the maximum credit of 50% of their contributions. So the Saver’s Credit will reduce their total tax liability by $2,000 ($1,000 per spouse).

Credits, deductions and caveats

Christopher Jervis, president of Lone Wolf Financial Services LLC in Conyers, Georgia, says it’s important to understand the difference between the deduction you receive for contributions and the tax credit.

“A deduction simply ‘deducts’ that amount off  the amount of income subject to taxation, while a credit is a dollar-for-dollar reduction in the tax you owe,” Jervis says. “Credits are like cash paid to reduce the tax.”

Jeffrey Schneider, an enrolled agent with SFS Tax & Accounting Services in Stuart, Florida, points out a caveat: the credit is not refundable, meaning the Saver’s Credit would not result in a refund if it happens to reduce your federal income tax bill below zero.

Also, keep in mind that rollover contributions, such as funds moved from a former employer’s 401(k) plan to an IRA, do not qualify as contributions for the Saver’s Credit.

Taking distributions from a retirement account during the tax year can also impact the credit.

“Recent distributions from the retirement plan can limit, or even eliminate, the amount of the credit received,” Jervis says. “So if you recently pulled money out of your retirement plan, don’t expect the full credit.”

How can I claim the Saver’s Credit?

You claim the Saver’s Credit by filing Form 8880 with your individual 140 tax return.

If you were eligible to claim the credit in a prior year but didn’t, you’re in luck.

“If you think you qualify and didn’t take the credit, you can go back and amend returns from up to three years ago to take the credit and receive an additional refund,” Jervis says.

Bottom line

Many eligible taxpayers miss out on the valuable Saver’s Credit. According to the 17th Annual Transamerica Retirement 2016 Survey, just one in three American workers is aware of the credit. That’s unfortunate, as the Saver’s Credit is meant to help qualifying taxpayers who find it extra challenging to save for retirement but manage to do so.

If you’re eligible for it, the Saver’s Credit could not only reduce your tax bill, but also repay you for doing something you know you should do — saving for your retirement.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

About the author: Janet Berry-Johnson is a freelance writer with a background in accounting and insurance. She has a bachelor’s degree in accounting from Morrison University. Her writing has appeared in Capitalist Review, Chase News &a… Read more.