Do I qualify for a tax credit for contributing to my IRA?
Individual Retirement Account (IRA) contributions play a vital role when it comes to retirement savings. They not only help you build a significant retirement corpus but also allow you to avail tax benefits.
Once you invest in an IRA, you may be able to take a retirement savings contribution credit based on the amount you invest. However, you must meet the eligibility criteria to qualify for a tax credit for contributing to your IRA. The amount of credit will be decided based on your gross income and the amount you contribute to the IRA. To learn more about IRA rules and how an IRA account can fit in your overall retirement strategy, consult with a professional financial advisor who can advise you on the same.
Read below to learn more about saver’s tax credit to know how if you are eligible, and how you can benefit from filing for one.
Table of Contents
What is a saver’s tax credit?
The saver’s tax credit or the retirement savings contribution credit is a non-refundable tax credit for middle and low-income taxpayers.
You can get a tax credit of up to $1,000 a year. However, if you are married and filing for a tax credit jointly, you can get a tax credit of up to $2,000 yearly. To enjoy the tax credit benefits, you must be making contributions to your IRAs.
Who can claim the saver’s tax credit?
If you want to claim the saver’s tax credit, you must meet the eligibility criteria as per the Pension Protection Act of 2006 (PPA). To do so, you must be at least 18 years old. You cannot claim a tax credit if you are a student and are enrolled in any school or university full-time, or as a dependent on another person filing a tax return.
Apart from the minimum eligibility criteria, you must contribute to the IRA to claim a retirement savings credit. The IRS sets an income cap and creates several income slabs based on which you can file your tax credit. The individual’s gross income must be within a specific limit to claim the saver’s tax credit.
- The income should not exceed $76,500 if you file jointly with your spouse for a tax credit.
- The income cannot go beyond $57,375 if you are filing for a tax credit as a head of a household.
- Any other individuals who wish to apply for the saver’s tax credit must have an income of up to $38,250 annually.
Tax credit calculations do not consider any rollover contributions. For instance, if an individual changes his job and transfers the money from one retirement account to another, they will not be eligible to claim a tax credit. Therefore, you must refrain from including the rollover amount while computing your retirement savings credit. Also, if the contribution amount exceeds the prescribed limit, you must divest it within a set time frame to avail of a tax credit.
Do I need to make qualifying contributions to claim the saver’s tax credit?
You need to make contributions to only those accounts that qualify to enjoy the benefits of the saver’s tax credit. Moreover, several employer-administered retirement plans and individual retirement accounts are eligible for a tax credit.
1. Employer-administered retirement plans
The contributions that you make from your pre-tax salary are eligible for a tax credit if you contribute to the following accounts:
- 401(k)plan
- SIMPLE 401 (k)
- Any Government 457 (b) plan
- 403(b)
- SIMPLE IRA
- Simplified Employee Pension (SEP)
2. IRA plans
You can claim a tax credit for contributions to an IRA. These retirement accounts include:
- Traditional IRA
- Roth IRA
- 403(b) annuity
- Contributions to Achieving a Better Life Experience or ABLE accounts
What is the value of the saver’s credit?
The value of the retirement savings credit is derived by considering the amount you contribute to a traditional IRA or a simple IRA. Even your contributions to an ABLE account or 403 (b) account are considered for calculating the tax credit. You will get an amount equivalent to 50%, 20%, or 10% of the contributions based on the amount you contribute. The final tax credit amount also depends on your gross income and filing status. However, at any point in time, the amount of credit cannot exceed $1,000 ($2,000 if filed jointly with a spouse).
What is the saver’s credit rate for 2025?
You can refer to the table below to understand the percentage of tax credit you can claim based on your gross income for the year.
| Type of Taxpayers | 50% of the contribution | 20% of the contribution | 10% of the contribution |
| A married couple filing jointly | $46,000 or below | $46,001 – $50,000 | $50,001 – $76,500 |
| Head of Household | $34,500 or below | $34,501 – $37,500 | $37,501 – $57,375 |
| Other Individuals | $23,000 or below | $23,001 – $25,000 | $25,001 – $38,250 |
The rates listed above are the revised rates and are applicable for 2025. Also, note that if your income exceeds $76,500, you will not be eligible for any tax credit.
How to calculate a saver’s credit
Now that you know what retirement savings contribution credit is, you must know how to calculate it. The calculation of tax credit is quite simple. The percentages applicable to the calculation are 50%, 20%, and 10%, based on your gross income.
Let’s take an example to understand this better. If an individual has a gross income of $19,000 per annum and contributes $1,000 yearly to his IRAs, he is eligible for a 50% tax credit on his contribution as per the slab. Hence, his retirement savings contribution credit will amount to $500.
However, if the individual earns $19,000 and contributes $5,000 yearly towards an IRA, he will only get $1000 as a tax credit (because $1,000 is the upper limit of the tax credit).
What is the process of claiming the tax credit?
If you want to file a tax credit, you must complete a set of formalities. You must fill out the IRS Form 8880, also known as the ‘Credit for Qualified Retirement Savings Contribution.’ You must also enter the tax credit amount on Form 1040 or 1040A. Once you fill in and add the necessary details, submit the forms.
Now, if your income does not exceed the prescribed amount for filing tax, you can declare the total contributions you and your spouse made. The amount of credit will then be decided based on the contributions you make jointly as a couple and the adjusted gross income. Post calculation, add the amount to Form 1040, and submit it along with Form 8880 while filing your tax returns.
To conclude
Tax credits can offer significant relief to low and middle-income individuals. It is even more advantageous if a married couple jointly files for a tax credit. However, before you file a tax credit, you must check your eligibility. You must also ensure that you fill out the IRS Form 8880 before you submit your tax returns for the year. Remember, all tax credits can be availed in addition to any applicable tax deductions.
In case of ambiguity, reach out to a financial advisor who can provide you with further information and assistance. Use the free match tool to get connected with vetted financial advisors suited to meet your financial needs. Answer a few simple questions, and the tool will connect you with 1-3 advisors that may be able to help you.
