The Little-Known “Retirement Savings Contributions Credit”

Share with

Share on linkedin
Share on facebook
Share on twitter

You probably know about the benefits of tax-deferred investment accounts. But did you know that there is a special IRS provision that potentially allows you to save money just for being a retirement saver? The so-called “saver’s credit,” formally known as the Retirement Savings Contributions Credit, permits certain low- to middle-income workers to claim a tax credit for making eligible contributions to an IRA or most qualified workplace retirement plans.

However, this tax break is currently going largely untapped. According to a study by the nonprofit Transamerica Center for Retirement Studies, only about a third of U.S. workers are aware of the saver’s credit.¹

Rules for the Retirement Savings Contributions Credit

In order to claim the credit, the IRS ² requires that you:

● Are at least 18 years old;

● Are not a full-time student; AND

● Cannot be claimed as a dependent on another person’s tax return.

Retirement plans eligible for the credit include:

● Traditional or Roth IRAs

● 401(k)s and 403(b)s

● SIMPLE IRAs

● SARSEPs

● 501(c)(18) or governmental 457(b) plans

● Voluntary after-tax employee contributions to qualified retirement and 403(b) plans.

The Amount You Can Claim

According to the IRS, “The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A).”

Here’s a breakdown for tax year 2016:

Credit rate

Married filing jointly

Head of household

All other filers*

50% of contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of contribution

$37,001-$40,000

$27,751-$30,000

$18,501-$20,000

10% of contribution

$40,001-$61,500

$30,001-$46,125

$20,001-$30,750

0% of contribution

more than $61,500

more than $46,125

more than $30,750

*Single, married filing separately, or qualifying widow(er).

To learn more about the saver’s credit visit the IRS website. For help shaping up your retirement planning and/or tax planning strategy contact your CPA or Certified Financial Planner™.

¹ Transamerica Center for Retirement Studies, “Retirement Throughout the Ages: Expectations and Preparations of American Workers,” May 2015.

² IRS, “Retirement Savings Contributions Credit,” updated February 22, 2016.

This commentary reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by our firm or performance returns of any our firm’s clients. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.