What is the saver's credit?
(Revised November 2012)

The saver's credit is a tax credit, based upon contributions to an IRA or 401(k) plan at work, that is supposed to encourage relatively low-income individuals to fund retirement savings. The maximum credit is $1,000, based on a $2,000 contribution to the IRA or 401(k) plan; on joint returns this maximum credit increases to $2,000.  Contributions to all kinds of IRAs (e.g. ROTH IRA and traditional IRAs) qualify for the savers credit.  

Generally, the only persons who can claim this credit are lower income adults who are not claiming certain other specific credits (e.g. hope education credit, child credit or child care credit); the saver's credit can only be claimed once you have used up all of these other specific credits. If these other credits reduce your tax liability to zero, you won't qualify for a savers credit. However, the earned income tax credit has no effect on the saver's credit; therefore, you can get both a saver's credit and a full earned income tax credit.

Originally, the savers credit was supposed to expire at the end of 2005; however, subsequent legislation made the credit permanent.

To get this credit, individuals must meet all four of these requirements:

  1. There is an income limitation. Adjusted gross income must not exceed $50,000 for joint returns, $37,500 for filing head of household, or $25,000 for filing single or married filing separately.  In most cases, "adjusted gross income" is the total income less any deduction for IRA contributions and qualifying student loan interest.
  2. The individual must be over eighteen-years-old by year-end.
  3. The individual must be able to claim him or herself.
  4.  The individual cannot be a full-time student.  For this purpose, an individual is considered to be a 'full-time student' if he or she attends an educational institution during some part of 5 or more months during the year and is enrolled as a full-time student. Individuals taking certain farm training courses are also considered to be students for this purpose.

The saver's credit is a percentage of the contributions to both IRAs and employer 401(k) type retirement plans.  As income rises, the percentage goes down starting from 50%.  The following data is for 2012 inocme tax returns:

Head of Household
Married Filing Jointly
All Other Filers
"Saver's Credit"
$0 - $25,875
$0 - $34,500
$0 - $17,250
50% of contribution
$25,876 - $28,125
$34, 501 - $37,500
$17,251 - 18,750
20% of contribution
$28,126 - $43,125
$37,501 - $57, 500
$18,751 - $28,750
10% of contribution
Over $43,125
Over $57,500
Over $28,750
No credit

If you or your spouse (if you are married) receive any distributions from IRAs or retirement plans during a time period that starts with January 1st of the previous year and goes through the due date (including extensions) of your tax return, you will probably see a reduction in your saver's credit.  Tax-free rollovers from one plan to another plan, won't affect your saver's credit.

The following example helps explain how this reduction works.

If an individual contributes $3,000 to a 401(k) plan during 2012, but had taken a $500 IRA withdrawal during that year and a $900 IRA withdrawal during 2011 (and neither of these withdrawals were rolled over), the amount of that individual's 2012 plan contribution eligible for the credit is $1,600 ($3,000 - $500 - $900), instead of the $2,000 that would have been eligible for the credit if no withdrawals had been taken.

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