Saver's Credit
April 5, 2007
What is the Saver’s Credit?
The Saver’s credit is a non-refundable tax credit available to eligible taxpayers who set aside part of their pre-tax compensation in their employer-sponsored retirement plan and/or make contributions to a traditional or Roth individual retirement account (IRA).
A non-refundable tax credit is a designated amount that taxpayers can claim on their income tax return. The credit only applies as a reduction to income tax liability.
Contributions made to any of the following savings vehicles are eligible for the credit: a 401(k) plan, including a SIMPLE 401(k); a section 403(b) annuity; an eligible deferred compensation plan of a state or local government, also known as a governmental 457 plan; a SIMPLE IRA plan; or a salary reduction SEP. The Saver’s credit is also available for voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity.
How does the Saver’s Credit work?
The maximum annual contribution eligible for the Saver’s credit is $2,000. The maximum credit available to taxpayers maximum is $1,000, or 50 percent of your contribution, per individual. However, the actual credit allowance given is based on the taxpayer’s adjusted gross income (AGI) and filing status. The lower your income, the higher the percentage you get back via the credit.1
If you are eligible to deduct IRA contributions or to exclude plan contributions from your gross income, you can still deduct and exclude those amounts and claim the Saver’s credit. However, the amount of the Saver’s credit will not change the amount of any refundable tax credits to which you may be entitled, such as the earned income credit or the refundable amount of your child tax credit.
Who is eligible?
In order to be eligible for the Saver’s credit, an individual must be at least 18 years old by the end of the applicable tax year. Individuals who are full-time students and/or are claimed as a dependent on another taxpayer’s return are ineligible.
The individual’s AGI must not exceed the following 2007 limits:
| Credit Rate | Married Filing Jointly | Head of Household | All Other Filers |
|---|---|---|---|
| 50% of contribution | $0 - $31,000 | $0 - $23,250 | $0 - $15,500 |
| 20% of contribution | $31,001 - $34,000 | $23,251 - $25,500 | $15,501 - $17,000 |
| 10% of contribution | $34,001 - $52,000 | $25,501 - 39,000 | $17,001 - $26,000 |
The Saver’s Credit AGI limits will increase in $500 increments for inflation.
As you can see from the chart, the lower the individual’s AGI, the higher the Saver’s credit, which helps increase the incentive for lower-wage taxpayers to fund their retirement accounts.
Example
Jane, whose tax-filing status is single, has an AGI of $15,000. Jane contributed $800 to her employer-sponsored 457 plan and also contributed $600 to her traditional IRA. Jane is therefore eligible for a non-refundable tax credit of $700 [($800 + $600 = $1,400 x
50%]. Had Jane’s AGI exceeded $26,000, she would not be eligible for the credit.
1The amount of any contribution eligible for the Saver’s credit is reduced by the amount of any taxable distribution received by the taxpayer (or by the taxpayer’s spouse if the taxpayer filed jointly) from any plan described above during the testing period. The testing period consists of the year for which the credit is claimed, the period after the end of that year, and before the due date for filing the taxpayer’s return for that year, and the two taxable years that precede the year for which the credit is claimed.
Participants are advised to seek advice on tax matters from a qualified tax professional. AC: 0307-1254