What is the "saver's credit"?
(Revised November 2006)
 

The "savers credit" is a tax credit that is supposed to encourage relatively low income individuals to fund retirement savings.   The credit is based upon contributions to an IRA or 401(k) plan at work. The maximum credit is $1,000, based on a $2,000 contribution to the IRA or 401(k) plan. On joint returns, the maximum credit is $2,000.  Contributions to all kinds of IRAs (e.g. ROTH IRA and traditional IRAs) qualfify for the "savers credit".  

Generally, the only persons who can use this credit are lower income adults who are not claiming certain credits (e.g. hope education crerdit, child credit or child care credit). The "savers credit" can only be used after you have used up the other credits previously mentioned.. If these other credits reduce your tax liability to zero, you won't qualify for a "savers credit". However, one major credit-- the earned income tax credit-- has no effect on the "saver's credit". Therefore, you can get both a "saver's credit" and a full earned income tax credit.

Originanally, the "savers credit" was supposed to expire at the end of 2005.  However, subsequent legislation made the credit permanent.

To get this credit, the individuals must meet four requirements:

  1. There is an income limitation. Adjusted gross income must not exceed $50,000 for joint returns, $37,500 for filing head of household, or $25,000 for filing single or married filing separately.  In most cases, "adjusted gross income" is the total income less any deduction for IRA contributions and qualifying student loan interest.
  2. The individual must be over 18 years old by year-end.
  3. The individual must be able to claim himself or herself. And
  4. The individual cannot be a full-time student.  For this purpose, an individual is considered to be a "full-time student" if he or she attends an educational institution during some part of 5 or more months during the year and is enrolled as a full-time student. Individuals taking certain farm training courses are also considered to be students for this purpose.

The "saver's credit" is a percentage of the contributions to both IRAs and employer 401(k) type retirement plans. As income rises, the percentage goes down starting from 50% as shown below:

 

Head of
household

Married filing
joint return

All other
filers


"Savers credit"
$0 - $22,500 $0 - $30,000 $0 - $15,000 50% of contribution
$22,501 - $24,375 $30,001 - $32,500 $15,001 - $16,250 20% of contribution
$24,376 - $37,500 $32,501 - $50,000 $16,251 - $25,000 10% of contribution
Over $37,500 Over $50,000 Over $25,000 No credit

After year 2006, the above income ranges will be adjusted for inflation.

If you or your spouse (if you are married) receive any distributions from IRAs or retirement plans during a time period that starts with Janaury 1st of the previous year and goes through the due date (including extensions) of your tax return, you will probably see a reduction in your saver's credit.  Tax free rollovers from one plan to another plan, won't affect your saver's credit.   

The following example helps explain how this reduction works.

 
Example
If an individual contributes $3,000 to a 401(k) plan during 2005, but had taken a $500 IRA withdrawal during that year and a $900 IRA withdrawal during 2003 (and neither of these withdrawals was rolled over), the amount of that individual's 2006 plan contribution eligible for the credit is $1,600 ($3,000 - $500 - $900), instead of the $2,000 that would have been eligible for the credit if no withdrawals had been taken.

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