The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in Nevada is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans. The advisor asked:
“Can you remind me of the special tax credit available for individuals who make retirement savings contributions, please?”
Highlights of Discussion
Absolutely—after all, it is tax time! IRA owners, retirement plan participants (including self-employed individuals) and others may qualify for the IRS’ “Saver’s Credit” for certain contributions made to eligible savings arrangements. Details of the credit are online here and in IRS Publication 590-A.
The credit:
- equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040NR);
- relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
- is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.
Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to these savings vehicles:
- traditional or Roth IRA
- 401(k)
- SIMPLE IRA
- Salary Reduction Simplified Employee Pension (SARSEP)
- 403(b)
- governmental 457(b)
- Federal Thrift Savings Plan
- ABLE account*
- tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D)
* The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from ABLE accounts can help designated beneficiaries pay for qualified disability expenses on a tax-free basis.
In general, the contribution tax credit is available to an individual who:
- is age 18 or older;
- is not a full-time student;
- is not claimed as a dependent on another person’s return; and
- has income below a certain level (see table below).
2021 Saver’s Credit Income Levels
|
Credit Rate |
Married Filing Jointly |
Head of Household |
All Other Filers* |
|
50% of your contribution |
AGI not more than $39,500 |
AGI not more than $29,625 |
AGI not more than $19,750 |
|
20% of your contribution |
$39,501 - $43,000 |
$29,626 - $32,250 |
$19,751 - $21,500 |
|
10% of your contribution |
$43,001 - $66,000 |
$32,251 - $49,500 |
$21,501 - $33,000 |
|
0% of your contribution |
More than $66,000 |
More than $49,500 |
More than $33,000 |
*Single, married filing separately, or qualifying widow(er)
The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.
Conclusion
Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2022, Retirement Learning Center, LLC. Used with permission.
