The Retirement Savers Credit, formally known as the Retirement Savings Contributions Credit, is a tax incentive to save for retirement. If you qualify, when you put money in a qualified retirement account such as a 401(k), IRA, Roth IRA, or 403(b), the government reduces your taxes. This credit is in addition to the immediate deduction you get for contributions to many retirement plans. Perhaps disappointed by how little most taxpayers save for their futures, the government created this incentive on top of the deduction most people know about. If you’re eligible, it’s truly a win-win.
Depending on your income level, a certain percentage of the amount you save for retirement is eligible for this credit. The maximum savers credit may be as much as $1,000 ($2,000 for married couples). To qualify, you (obviously) need to be saving for retirement in a qualified account. Unfortunately, the income limits are not very high. Married savers filing jointly with an Adjusted Gross Income (AGI) below $56,500 qualify for the credit, as do Heads of Households with an AGI less than $42,375 and singles with an AGI less than $28,250.
Unlike tax deductions which reduce your taxable income, credits reduce your tax on a dollar-for-dollar basis. Accordingly, while a $100 tax deduction for a low-income taxpayer might save him $10 or $15 in tax, a $100 credit saves him $100. Note, however, that the Retirement Savers Tax Credit is not refundable. That does not mean you can’t get a refund when you file your taxes if you take the credit. However, a tax credit’s being non-refundable means that the credit cannot reduce your overall tax liability (including what you pay throughout the year via federal income tax withholding) to less than zero.
Since many people stopped contributing to their defined contribution plans during the 2008-2009 financial crisis (or contributed less) due to hardship or simply because their employer stopped offering a match, this credit can provide a major incentive for some to go back to contributing or to contribute more. In effect, it’s free money and you should never turn down free money, especially when doing so will help your retirement security too.