Take Advantage of the Saver's Credit for 401(k) Plan Contributions

Also known as the retirement savings contribution credit, the Savers Credit encourages lower-income employees to save for retirement by giving them a tax credit based on a percentage of their contribution. It can apply to 401(k) plans, IRAs, and other retirement plans. Because it is additional to other tax-deferrals and deductions, it can help you get the most out of your retirement plan.

What are the income limits?

 As of this writing, income requirements are as follows:

• Single, married filing separately, or qualifying widow, with income up to $36,500

• Head of household with income up to $54,750
• Married filing jointly with income up to $73,000

Save up to $1,000 (or $2,000 for joint filing)

If you make contributions to a qualified IRA, 401(k), or certain other retirement plans, you may be able to take a credit of up to $1,000, or $2,000 if filing jointly. Depending on your adjusted gross income (AGI) and filing status, the Savers Credit rate may be 10%, 20%, or 50% of your contribution.

For example, a single taxpayer whose AGI is $25,000 and makes a $2,000 contribution to their 401(k) plan will have a credit rate of 10%, or a $200 savings on their tax bill.

In another example, a married couple with a joint income of $30,000 can each contribute $1,000 to their respective retirement plans – for a total contribution of $2,000. They will qualify for a 50% tax credit and reduce their tax bill by $1,000.

To determine how much your Savers Credit may be, refer to the IRS chart below.

2023 Savers Credit

Source: IRS.gov

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

Who Qualifies for the Savers Credit?

To be eligible for the Savers Credit you must have been born before January 2, 1993, cannot have been a full-time student during the calendar year, and cannot be claimed as a dependent on another person’s return.

How do I apply?

You can apply for the credit using Form 8880, Credit for Qualified Retirement Savings Contributions, or when using most electronic tax-filing services. For more information, visit the IRS website or contact your tax professional.

What’s next for the Savers Credit?

Two bills are now being proposed in Congress that would increase Savers Credit limits. The Securing a Strong Retirement Act of 2020 proposes increasing the maximum to $1,500. The Encouraging Americans to Save Act would replace the traditional savers tax credit with federal matching payments. Stay up to date with Paychex retirement services.