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What is Savers Credit & How Does it Work?

What is Savers Credit & How Does it Work?


A pension credit, also called a saver's credit, is a tax credit you can claim by contributing to a pension fund. The credit is calculated on your tax return, which is more beneficial than a tax deduction because it provides a dollar-for-dollar reduction on your tax bill. If you receive a $500 saver's credit, you'll pay $500 less on your taxes.

The aim of the Saver's credit is to help put money back in your pocket after having saved for your retirement. It's like an incentive for people to save money for retirement with the added benefit of getting credit.


Who can apply for the saver's credit?

You can apply for the saver's credit regardless of your filing status: married, jointly filing, head of household, single, separated, married, or eligible widower can benefit from the credit. However, your marital status determines the maximum income you are entitled to.

There are three conditions to be able to apply for the saver's credit:

First, you must be over 18 and not dependent on someone else's or a student's tax return.

Therefore, you must have income below the income threshold for your filing status. The maximum income for the 2022 tax year is $68,000 for co-filers and $51,000 for heads of households. If you file in another category, your AGI is limited to $34,000. For the 2023 tax year, the maximums are $73,000, $54,750, and $36,750.

Since the qualifying income is low, it can be difficult to have the right income and pay taxes. It would attract young people who are working and don't have high incomes, as well as retirees or seniors who have lower incomes but are still looking for ways to save money and taxes.

Finally, you must have contributed to a qualified account. Most contributions to one or more of the following retirement accounts are eligible:

  • 401(k), 403(b) or Government 457(b)

  • 501(c)(18)(D) plan.

  • An ABLE account

  • SARSEP or SIMPLE plan

  • Thrift Savings Plan

  • Traditional IRA or Roth

It's something seniors, or retirees should consider if they have a part-time income or if their spouse has a part-time income.

Note: accumulated contributions are not taken into account for the saver's credit. So even if you transfer a 401(k) from your old employer to your new company's retirement plan, those funds won't earn you that tax credit. Additionally, you must be a tax debtor to use the credit, as it is only meant to reduce your tax liability to zero.


How much is the saver's credit?

People eligible for the saver's credit will receive a percentage of their retirement contribution in the form of a tax credit. The saver's credit is worth 10%, 20%, or 50% of your contribution, depending on your income level, but you can only get the credit on the first $2,000 per person and $4,000 per couple (joint income) that you contribute to retirement.

Alternatively, the maximum credit someone can receive is 50% of $2,000 (or $1,000), but the credit can go up to $2,000 if you are married and filing jointly. Then you can reduce your tax bill by up to $1,000 per person by taking advantage of the saver's credit.

The table below explains the percentage you will receive based on your income for the current tax year 2022:

Credit rate

Married filing jointly

Head of household

All other filers*

50% of your 2022 contribution

AGI under $41,000

AGI under $30,750

AGI under $20,500

20% of your 2022 contribution

$41,001-$44,000

$30,751-$33,000

$20,501-$22,000

10% of your 2022 contribution

$44,001-$68,000

$33,001-$51,000

$22,001-$34,000

0% of your 2022 contribution

Over $68,000

Over $51,000

Over $34,000

Source: IRS. * Single, separated married, or qualified widower

And here are the rates for 2023:

Credit rate

Married filing jointly

Head of household

All other filers*

50% of your 2023 contribution

AGI under $43,500

AGI under $32,625

AGI under $21,750

20% of your 2023 contribution

$43,501-$47,500

$32,626-$35,625

$21,751-$23,750

10% of your 2023 contribution

$47,501-$73,000

$35,626-$54,750

$23,751-$36,500

0% of your 2023 contribution

Over $73,000

Over $54,750

Over $36,750

Source: IRS. * Single, separated married, or qualified widower


How to calculate a saver's credit

Doing the calculation to find your total saver's credit is easier than it looks. For example, let's say you earn $30,000 as a head of household (HoH) and contribute $4,000 to your traditional IRA for the 2022 tax year. You would be eligible for a 50% credit on the first $2,000 you contribute. Then you will get a saver's credit of $1,000. Plus, let's say you end up owing $900 in taxes - you're free to pay anything that year.

Note: Contributions you make to a tax-deductible retirement account, like a traditional IRA or 401(k), reduce your taxable income by the amount you contribute. This type of deduction can further reduce the taxes you owe.


The Bottom Line

Saver's credit is a method of reducing tax bills for those who can apply for it. These savings can offset some of the cost of contributing to a retirement account and reduce the burden of saving for retirement.

When you file your tax return, be sure to check your filing status, income, and contribution level using the information provided in this article to see if you are eligible for the saver's credit.


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Dennis Jao
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