Tax Credit for IRAs and Retirement Plans (Saver’s Credit)

The Economic Growth and Tax Relief Reconciliation Act of
2001 made significant changes to IRAs and retirement plans. One provision of
the act allows some low- and middle-income taxpayers to claim a partial,
nonrefundable income tax credit (the “saver’s credit”) for contributing to
certain tax-deferred retirement savings vehicles. The credit can be applied
against the taxpayer’s regular income tax liability (or minimum tax liability,
if paying under the alternative minimum tax system) and is in addition to any
income tax deduction the taxpayer receives for making the contribution. The
purpose of this provision is to encourage retirement savings among those who,
typically, can least afford to save.

The tax credit is available for elective contributions
made to traditional
IRAs, Roth
IRAs, and the following
employer-sponsored retirement
plans: Section
401(k) plans, Section 403(b) annuities,
Section 457(b)
plans, SIMPLE
plans, and SEP
plans. Voluntary after-tax employee contributions made to a
qualified retirement plan also qualify for the credit.

Not everyone who contributes to the retirement savings
vehicles mentioned previously is eligible for the tax credit. To claim the
credit, you must be at least 18 years old and not a full-time student or
claimed as a dependent on another taxpayer’s income tax return. In addition,
there are income requirements that must be met. If you and your spouse file a
joint income tax
return, you can claim the credit for 2024 only if your combined
adjusted gross income (AGI) for the year is $76,500 or less. If you file as
head of
household, you can claim the credit only if your AGI is
$57,375 or less. Finally, if you file as an
unmarried
taxpayer or married filing separately, you can claim the credit
only if your AGI is $38,250 or less.

The maximum annual contribution eligible for the tax
credit is $2,000, and the maximum credit rate is 50% of the amount
contributed. This means that the maximum possible credit that a taxpayer could
receive in one year is $1,000. However, not everyone who qualifies for the
credit will be able to claim the full credit. The specific amount of your
credit (if any) in any year will depend on three factors: your AGI for the
year, your income tax filing status for the year, and the amount of your IRA or
retirement plan contribution for the year. The following tables (for 2023 and
2024, respectively) provide the credit rates based on AGI and filing status:

Finally, be aware that the amount of any contribution
eligible for the credit may be reduced by any taxable distributions that you
and your spouse receive from any of the retirement savings vehicles mentioned
previously (or from any other qualified retirement plan). This reduction
applies to distributions received during the same tax year that the credit is
claimed, the two tax years prior to the tax year that the credit is claimed,
and during the period after the end of the tax year and prior to the due date
for filing your tax return for the year. In the case of a Roth IRA, this rule
applies to any distributions received, whether taxable or nontaxable.