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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Saver's Tax Credit

What it is:

The saver's tax credit, also called the savers credit, is a tax credit for making contributions to certain retirement accounts.
 

How it works (Example):

The savers credit gives taxpayers a tax credit of up to $1,000 ($2,000 if filing jointly) for contributions to IRAs, 401(k)s and certain other retirement plans. The actual amount of the credit is a percentage of the savings amount (typically 10% to 50%). Taxpayers with the least income get the highest credits.

In order to qualify for the savers credit, the following must apply:

  1. The taxpayer is filing as single, married filing separately, or a qualifying widow(er) with below certain income limits (around $30,000, but it changes every year); if the taxpayer is filing as head of household, the income limit is around $44,000; if the taxpayer is married filing jointly, the income limit is around $59,000.
  2. The taxpayer was born before January 2, 1993, isn't a full-time student, and isn't someone's dependent.

Note that you must subtract any distributions you received from your retirement accounts over the last two years when calculating the credit. For example, if you added $2,000 to your 401(k) this year but also took out $2,000 from your 401(k) over the last two years, you would not receive a tax credit.

Why it Matters:

The savers tax credit is intended to encourage people to save. Though few taxpayers receive the full $2,000 tax credit, many likely argue that every little bit helps. Few people are aware of the credit, however, and so not all eligible taxpayers receive it.