Savvy Senior: How does the Retirement Saver’s Credit work?

Dear Savvy Senior,

Can you explain to me how the retirement saver’s tax credit works? My wife and I are in our fifties and are looking for creative ways to boost our retirement savings beyond our 401(k). Is this something we may be eligible for?

— Struggling to Save

Dear Struggling,

If your income is low to moderate and you participate in your employer-sponsored retirement plan or an IRA, the Retirement Savings Contribution Credit (aka “Saver’s Credit”) is a frequently overlooked tool that can help boost your retirement savings even more. Here’s how it works.

If you contribute to a retirement-savings account like a traditional or Roth IRA, 401(k), 403(b), 457, Thrift Savings Plan, Simplified Employee Pension or SIMPLE plan, the Saver’s Credit will allow you to claim 10, 20 or 50 percent of your contribution of up to $4,000 per year for couples or $2,000 for singles.

Keep in mind that a credit is not the same as a tax deduction – it’s better: While a tax deduction just reduces the amount of your income that is subject to taxes, a tax credit reduces your actual tax bill dollar-for-dollar.

To qualify, you must also be at least 18 years old and not a full-time student and were not claimed as a dependent on someone else’s tax return. And your adjusted gross income (AGI) in 2023 must be below $73,000 or less as a married couple filing jointly, $54,750 or less if filing as head of household, or $36,500 or less if you’re a single filer. These income limits are adjusted annually to keep pace with inflation.

To get the 50 percent credit, you’ll need to have an income below $43,500 for married couples filing jointly; $32,625 if you’re filing as head of household; and $21,750 if you’re a single filer in 2023.

The 20 percent credit rate applies to couples earning between $43,501 to $47,500; for head of household filers it’s $32,626 to $35,625; and for individuals it’s $21,751 to $23,750.

And the 10 percent rate is for couples with an adjusted gross income between $47,501 and $73,000; for head of household filers $35,626 to $54,750; and individuals it’s between $23,751 and $36,500.

Here’s an example of how this works. Let’s say that you and your wife earned $75,000 in 2023. Over the course of the year, you contributed $4,000 to your employer’s 401(k) plan. After deducting your 401(k) contribution, your adjusted gross income (AGI) on your joint return is now $71,000. Since your AGI puts you in the 10 percent credit bracket, and you’ve contributed the $4,000 maximum that can be considered for the credit, you are entitled to a $400 Saver’s Credit on your tax return.

It’s also worth mentioning that the Saver’s Credit is in addition to any other tax benefits you get for your retirement contributions. So, in the previous example, not only would you be entitled to a $400 credit, but you would also be able to exclude the $4,000 401(k) contribution from your taxable income. So, if you’re in the 12 percent tax bracket, this translates to an additional $480 in savings, for a total of $880.

HOW TO CLAIM

To claim the Saver’s Credit, you will need to fill out Form 8880 (see IRS.gov/pub/irs-pdf/f8880.pdf) and attach it to your Form 1040 or 1040NR when you file your tax return.

For more information on the Saver’s Credit, see IRS Publication 590-A “Contributions to Individual Retirement Arrangements” (IRS.gov/pub/irs-pdf/p590a.pdf).

The IRS also offers an online quiz you can take to help you determine if you qualify for the Saver’s Credit. To access it go to IRS.gov/Help/ITA – click on “Do I Qualify for the Retirement Savings Contributions Credit?” under the “Credits” tab.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.