If you make contributions to your IRA or employer-sponsored 401(k) retirement plan, you might be able to take advantage of the saver’s credit, also known as the Retirement Savings Contributions Credit.
Starting in 2018, if you were the designated beneficiary, you might also be eligible for a credit for contributions to your “Achieving a Better Life Experience (ABLE)” account, according to the IRS.
The IRS states that depending on the adjusted gross income reported on your Form 1040, the amount of the credit will be 50%, 20% or 10% of:
- contributions you make to a traditional or Roth IRA,
- elective salary deferral contributions to a 401(k), 403(b), governmental 457(b), SARSEP, or SIMPLE plan,
- voluntary after-tax employee contributions made to a qualified retirement plan (including the federal Thrift Savings Plan) or 403(b) plan,
- contributions to a 501(c)(18)(D) plan, or
- contributions made to an ABLE account for which you are the designated beneficiary (beginning in 2018).
For example, let’s say you made $45,000 in 2020 and contributed $2,000 to your IRA. In this case, $1,000 of the full amount contributed (50%) could be eligible to be claimed on your taxes. This reduces the taxable amount on your overall tax bill.
The IRS stresses that rollover contributions do not qualify for the tax credit. Additionally, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA. This means that if you are in the retirement or distribution phase for the retirement accounts you have spent time contributing to, you might be eligible to simultaneously take this tax credit.
The maximum amount anyone may qualify for with the saver’s credit is $1,000, meaning that $2,000 is the maximum amount you can claim.
The IRS has set up a helpful chart for taxpayers to determine their tax credit based on their filing status and income level, which can be found here.
More From GOBankingRates