Can the Saver’s Credit Save You Money on Your Taxes?

For many people, two of the most frightening words in the English language are death and taxes. Even among those for whom the words are not terrifying, they evoke strong emotion.

Another word that generates strong emotion is retirement. Unlike death and taxes, that word usually brings a smile to people’s faces. That is, until it is combined with the word savings.

For a portion of people, the idea of saving for retirement is a fantasy that slowly turns into a full-blown nightmare as they age. The reason is that, for many low- and moderate-income individuals and families, there are just not enough dollars in a paycheck to be able to put some aside for retirement.

What Is the Saver’s Credit?

The Saver’s Credit is an incentive to get those low- and moderate-income taxpayers to start saving more for retirement. It was first enacted by Congress in 2001 as part of President Bush’s tax-cut plan to provide a matching refundable credit that would be available to eligible taxpayers who made qualifying contributions to retirement plans. The refundable portion of the credit expired in 2006. The Saver’s Credit is now a nonrefundable credit that can increase the size of a refund or reduce the amount of tax owed.

The credit works in conjunction with other retirement saving credits and deductions. It applies to eligible taxpayers who make contributions to employer-sponsored retirement plans such as 401(k)’s, a simplified employee pension or SEP, governmental 457 plans, and both traditional and Roth IRAs, as well as others. The amount of the credit ranges from 10% to 50% of eligible contributions up to $2,000.


To qualify for the credit, you must be at least 18 years old, not be a full-time student, and not be claimed as a dependent on someone else’s tax return. You must also meet the following income retirements:

Credit AmountMarried Filing JointlyHead of HouseholdAll Others
50%Less than $36,000Less than $27,000Less than $18,000
IneligibleMore than $60,000More than $45,000More than $30,000

Amounts shown above are Adjusted Gross Incomes (AGI)

How Does the Credit Work?

The credit is limited to a percentage of your retirement contributions, and offsets your overall tax bill.

For example, if you file a joint return with your spouse and your adjusted gross income is $35,500, and you each contribute $1,000 to eligible retirement plans, you are allowed to take a credit of $1,000, or 50%, toward your tax bill. If the couple in this example had no other deductions or credits, their federal income tax for the year would be $1,270, which would be reduced to only $270 by the Saver’s Credit.

The credit is used to reduce your tax liability, even after your taxable income has already been reduced by certain retirement contributions.

For example, if you make a $4,000 contribution to an IRA, your taxable income is first reduced by $4,000. Then, the amount of income tax you’re subject to would be reduced dollar for dollar by the amount of your credit. The credit can be used to lower your tax liability to zero.

To take advantage of the credit, you must complete IRS Form 8880 and submit it along with your 1040, 1040A or 1040NR. Most tax preparation software will have this form included and will tell you whether you are eligible for the credit.