What Is the Qualified Retirement Savings Contribution Credit?

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Considering the high cost of housing, food and life in general, you’re probably looking for every financial break you can get. But at the same time, unless you want to work straight through your golden years, saving for retirement is a must? But sometimes, that can seem impossible.

One solution, however, is the Retirement Savings Contribution Credit. It’s available to many filers, depending on their IRS tax brackets. Here’s what you should know.

What Is the Retirement Savings Contribution Credit?

The Retirement Savings Contribution Credit, often referred to as the Saver’s Credit, is a tax benefit meant to encourage low- and moderate-income individuals and families to save money for retirement by contributing to qualified retirement accounts. It allows you to receive a tax credit equal to a percentage of your contributions to retirement savings accounts, such as 401(k)s, IRAs and similar accounts.

This effectively boosts your retirement savings while reducing your tax burden, making it a a win-win.

Do I Qualify for the Retirement Savings Contribution Credit?

The Retirement Savings Contribution Credit has very specific and graduated criteria for qualification, based mainly on your adjusted gross income, tax filing status and the type of retirement account you contributed to during the year. Here’s a rundown of the criteria for the tax year 2024.

Income Limits

The credit is intended for low- and moderate-income earners. For 2024, the income limits are:

• AGI of $76,500 for those who file as married filing jointly.
• AGI of $57,375 or less for those who file as head of household.
• AGI of $38,250 for those who file as single, married filing separately or qualifying widow(er).

Qualifying Types of Retirement Accounts

Only contributing to certain retirement accounts qualify you for the Retirement Savings Contribution Credit. It should be said, however, that a good retirement plan usually includes one of these accounts. Here are the types of accounts that are recognized:

• 401(k) Plans
• 403(b) Plans
• 457(b) Plans
• SARSEP IRA
• SIMPLE IRA
• Traditional IRA
• Roth IRA
• Governmental 457 Plans
• 501(c)(18)(D) plan

Age and Other Requirements

You must be at least 18 years old and cannot be a full-time student or be claimed as a dependent by someone else on their tax return.

How Does the Retirement Savings Contribution Credit Lower Your Tax Bill?

You probably won’t be surprised that the IRS has not made this as straightforward as giving you a credit for the amount you contribute to your retirement savings. Instead, the Retirement Savings Contribution Credit value varies based on your filing status and income level.

For 2024, the IRS allows for a credit of 10%, 20%, or 50% of your contributions, up to a maximum contribution limit of $2,000 for individuals or $4,000 for married couples filing jointly. This results in a maximum tax credit of $1,000 ($2,000 if married filing jointly).

Here are the credit rates:

• 50% of your contribution for an AGI up to $23,000 (single) or $46,000 (married)
• 20% of your contribution for an AGI 23,001 to $25,000 (single) or $46,001 to $50,000 (married)
• 10% of your contribution for an AGI 25,001 to $38,250 (single) or $50,001 to $76,500 (married)

So, as an example, if you contributed $2,000 to your retirement account during 2024, and qualify for the 50% credit with an AGI of $23,000 or less as a single filer, you would receive a tax credit of $1,000. This would effectively make your retirement contributions cheaper while lowering your tax burden by $1,000. That’s the power of the Retirement Savings Contribution Credit.

Why Is a Tax Credit Better Than a Tax Deduction?

To understand why the Retirement Savings Contribution Credit is more beneficial than a tax deduction, here’s a breakdown of how each works:

Tax Deduction

A tax deduction, or tax write-off, is an amount you subtract from your taxable income before you calculate your tax liability. This means that  you pay taxes on a smaller income amount. So, if you have a taxable income of $50,000 and claim a $1,000 deduction, your taxable income becomes $49,000. The actual tax savings depend on your tax rate, but for someone in the 22% bracket, this results in a $220 tax reduction.

Tax Credit

A tax credit, on the other hand, reduces your tax bill after you have calculated your taxes due. So, if you owe $1,000 in taxes and qualify for a $500 tax credit, your tax liability is reduced to $500.

Given this structure, a tax credit is more beneficial than a deduction of the same amount. Therefore, if you received a $1,000 tax credit versus a $1,000 tax deduction, the credit reduces your tax bill by $1,000, while the deduction only reduces your taxable income, resulting in a smaller tax savings, based on your rate.

How Does the Qualified Retirement Savings Contribution Credit Work?

The Retirement Savings Contribution Credit is structured so that the more you contribute to your retirement savings, the bigger your credit can be, within limits, of course.

1. Contributions: To begin with, you must make contributions to an eligible retirement plan, with the amount you contribute determining your credit amount, assuming you qualify.
2. Calculate your credit: Based on your filing status and AGI, you calculate the percentage of your contributions that will qualify for the credit. For example, if you contribute $2,000 and fall into the 50% category, your credit will be $1,000.
3. Claim the credit: You must complete IRS Form 8880 (Credit for Qualified Retirement Savings Contributions), which helps you determine the amount of your credit and is filed with your tax return.

Why You Should Take Advantage of the Qualified Retirement Savings Contribution Credit at Every Age

Saving for a comfortable retirement is not a sprint in the twilight of your career. At least it shouldn’t be if you want a decent chance at success. Here is some general advice by decade from experts, and how the Qualified Retirement Savings Contribution Credit fits in.

In your 20s

This is when you can take the most risk with your retirement savings. For instance, your portfolio could be made up of 60% or more of stocks. Many experts recommend trying to build your retirement savings to the equivalent of one year’s salary by your 30th birthday. Since every dollar is critical, and has enormous growth potential when invested early, the Retirement Savings Contribution credit could be very valuable.

In Your 30s

Experts say to begin to aim for a balanced portfolio of stocks and bonds, but continue to contribute as much as you can. If your employer matches retirement contributions, take full advantage. Maximize your Retirement Savings Contribution Credit while it’s available and try to have three times your annual salary saved by the time you’re 40.

In Your 40s

Your earning potential may peak during your forties so focus on increasing your retirement contributions and ensure you’re taking full advantage of the Retirement Savings Contribution Credit if you remain eligible. If you can get your retirement savings to six times your annual salary by age 50, you’re doing great.

In Your 50s

For better or worse, retirement is on the horizon, so stay steady on your contributions and make catch-up contributions if you can. If you are still eligible, the Retirement Savings Contribution Credit can help with your goal: eight times your annual salary by age 60 and 10 times it by age 67.

The Bottom Line

In today’s frenetic and expensive world, saving for retirement can often be bumped off the To Do List. But that could lead to regret later in life, so you should use every tool and advantage at your disposal. The Qualified Retirement Savings Contribution Credit is a powerful one. 

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