You May Be Able To Get $226K in Free Retirement Money: Here’s How

Happy senior couple sitting on a bench in city center.
poba / Getty Images

Most investors are aware of the immense benefits of tax-deferred retirement accounts, such as IRAs and 401(k) plans. In addition to potentially receiving a tax deduction on your contributions, your investments will grow tax-deferred until you withdraw the funds. In the case of a Roth IRA, you may forgo the initial tax deduction but you’re rewarded at retirement with tax-free withdrawals. But what if you could amp up your tax savings by 10%, 20% or even 50% every year you make a retirement plan contribution? For certain eligible taxpayers, those savings are readily available, thanks to an often-overlooked IRS tax benefit known as the retirement savings contribution credit.

Read: 8 New or Improved Tax Credits and Breaks for Your 2020 Return

What Is the Retirement Savings Contribution Credit?

The retirement savings contribution credit grants a tax credit for certain eligible contributions to an IRA or employer-sponsored retirement plan, such as a 401(k). Specifically, the credit applies to qualifying contributions to the following plans, per the IRS:

  • Traditional or Roth IRAs
  • Salary deferrals to a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE plans
  • After-tax employee contributions made to a qualified retirement plan; this includes the federal Thrift Savings Plan and 403(b) plans
  • 501(c)(18)(D) plans
  • ABLE accounts for which you are the designated beneficiary
Retire Comfortably

See: Avoid These 15 States in Retirement If You Want To Keep Your Money

Who Is Eligible for the Saver’s Credit?

There are two categories of eligibility requirements for the saver’s credit. First, you must be at least 18 years old, not claimed as a dependent and not a student. Second, you must meet the income requirements, as outlined below.

What Is the Maximum Amount of the Saver’s Credit?

The saver’s credit is limited to a maximum of $1,000, or $2,000 for joint filers. The amount of the credit is equal to 50%, 20% or 10% of the amount of your contributions, based on your adjusted gross income. But you don’t have to only enjoy the $1,000 or $2,000 you get — keep reading to find out how that can end up as more than $226,000.

Find Out: How To Avoid Paying Taxes Legally — and the 11 Craziest Ways People Have Done It

What Are the AGI Limits To Qualify For the Saver’s Credit?

Here are the AGI limits for tax years 2020 and 2021, by filing status:

Married Filing Jointly

  • 50% credit: $39,000 or less for 2020, $39,500 or less for 2021
  • 20% credit: $39,001-$42,500 for 2020, $39,501-$43,000 for 2021
  • 10% credit: $42,501-$65,000 for 2020, $43,001-$66,000 for 2021
  • 0% credit: More than $65,000 for 2020, more than $66,000 for 2021

More: 10 Brilliant Ways To Reduce Your Taxes in Retirement

Retire Comfortably

Head of Household

  • 50% credit: $29,250 or less for 2020, $29,625 or less for 2021
  • 20% credit: $29,251-$31,875 for 2020, $29,626-$32,250 for 2021
  • 10% credit: $31,876-$48,750 for 2020, $32,251-$49,500 for 2021
  • 0% credit: More than $48,750 for 2020, more than $49,500 for 2021

Read: 35 Retirement Planning Mistakes That Waste Your Money

All Other Filers

  • 50% credit: $19,500 or less for 2020, $19,750 or less for 2021
  • 20% credit: $19,501-$21,250 for 2020, $19,751-$21,500 for 2021
  • 10% credit: $21,251-$32,500 for 2020, $21,501-$33,000 for 2021
  • 0% credit: More than $32,500 for 2020, more than $33,000 for 2021

See: The Major Tax Changes for 2021 You Need To Know About

How You Can To Turn the Saver’s Credit Into $226,000

The saver’s credit alone won’t translate into $226,000 in extra retirement savings. However, if you use the credit properly, you could very well generate that much in additional savings in your retirement nest egg.

Take the example of a married couple filing joint taxes and claiming the full $2,000 credit for 30 years. If you invested that $2,000 at the end of every year and earned a return of 8% per year, after 30 years your account would be worth $226,566.42.

Find Out: What a Comfortable Retirement Will Cost You in Each State

This is an astonishing sum for what amounts to free money from the government. But that’s not even the best part. Remember that this princely sum is in addition to the money that you would also have by virtue of making maximum retirement contributions for 30 years. To earn the $2,000 per year in tax credits, you would have to contribute $4,000 per year to your retirement account, if you qualified for the 50% credit. If you earned the same 8% annual return on those investments, your retirement account would reach $453,132.84. Coupled with the extra money from your tax credits, your total nest egg would be $679,699.26. Not bad for putting just a few hundred dollars per month into your retirement account.

Retire Comfortably

More From GOBankingRates

Share this article:

Retire Comfortably

About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
Learn More

Best Bank Accounts for September 2022

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.