CARL WATTS & ASSOCIATES

November 17, 2014

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Retirement Savings
Contributions Credit
One of our recent newsletter’s topic was about retirement contributions and their limits. Those of you who qualify, should also find out more about the retirement savings contribution credit, also named the saver’s credit.

The saver’s credit is a lesser known tax credit that the IRS makes available to low and moderate income taxpayers who make retirement contributions to an IRA, 401K, 403B, 457, or any other IRS recognized retirement account.

The saver’s credit is an actual tax credit, not merely a tax deduction. While a tax deduction simply subtracts the value from your taxable income and you pay taxes on the remaining taxable income, a tax credit, on the other hand, actually gives you the entire dollar value back or subtracts the value from the taxes you owe, making it far more valuable monetarily than a deduction. In the case of the Saver’s Credit, it is non-refundable, meaning it can only be subtracted from the taxes you owe.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and 401(k) plans and similar workplace retirement programs. The saver’s credit is available in addition to any other tax savings that apply.

As usual, we turned to the IRS to find out what they have to say about the saver’s credit for the current and the following years.

First of all, eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2014 tax return. People have until April 15, 2015, to set up a new individual retirement arrangement or add money to an existing IRA for 2014.

However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, or the Thrift Savings Plan for federal employees.

Employees who are unable to set aside money for this year may want to schedule their 2015 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $60,000 in 2014 or $61,000 in 2015;

Heads of Household with incomes up to $45,000 in 2014 or $45,750 in 2015; and

Married individuals filing separately and singles with incomes up to $30,000 in 2014 or $30,500 in 2015.

If you are a low-to-moderate income worker, you can take steps now to save two ways for the same amount. With the saver’s credit you can save for your retirement and save on your taxes with a special tax credit.


Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax year 2012, the most recent year for which complete figures are available, saver’s credits totaling $1.2 billion were claimed on more than 6.9 million individual income tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $165 for heads of household and $127 for single filers.


The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

Eligible taxpayers must be at least 18 years of age

Anyone claimed as a dependent on someone else’s return cannot take the credit.

A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2014, this rule applies to distributions received after 2011 and before the due date, including extensions, of the 2014 return.

Form 8880 and its instructions have details on making this computation.

You should also consider help from a professional in any decision that impacts your taxes and your plans for retirement.
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