What is the Saver's Credit and How Does It Work?

The Saver's Credit gives you a tax credit of 50 percent, 20 percent, or 10 percent on the first $2,000 in contributions you make to a retirement account. The percentage you get depends on your adjusted gross income (AGI) and tax filing status, but you could potentially claim a credit of up to $1,000—or up to $2,000 if you file jointly with your spouse. You might think of it as a retirement match from the government.

The Saver's Credit is applied directly to your tax bill to reduce the amount of federal income tax you owe. For instance, if your tax bill is $1,000 and your credit is $400, you'd only owe $600. If your tax bill is $1,000 and your credit is $1,000, it's a wash. You'd owe nothing.

What if your tax bill is $500 and your credit is $1,000? Unfortunately, you'd only get the $500 applied to your bill. This is a nonrefundable tax credit, meaning that if your credit is larger than your bill, you don't get the difference.

To qualify, you must be 18 or older, not a full-time student, and not claimed as a dependent on someone else's tax return. Then you have to meet the AGI requirements. AGI is your gross income minus adjustments such as deductible retirement contributions, self-employment taxes, educator expenses, and student loan interest.

Of course, the final qualification is that you make a contribution to a retirement account. It's important to note that rollover contributions do not qualify for the credit, and eligible contributions may be reduced by recent retirement account distributions. Contributions to a wide range of retirement accounts qualify for this credit, including:

• Traditional IRA
• Roth IRA
• Traditional 401(k)
• Roth 401(k)
• 403(b)
• 457 plan
• SARSEP
• SEP IRA
• SIMPLE IRA
• Thrift Savings Plan
• ABLE account

Let's say you're single, your AGI is $24,500 and you contributed $1,200 to a qualified retirement plan. You could claim a 20 percent tax credit of $240 to offset your federal taxes.

Now let's say you're a married couple filing jointly and AGI is $39,000 and you each put $1,000 (for a total contribution amount of $2,000) into your IRAs. You'd be able to claim a 50 percent tax credit for a total of $1,000.

For most retirement accounts the deadline for making 2024 contributions that are eligible for the Saver's Credit is December 31, 2024. However, some accounts such as a traditional or Roth IRA, allow contributions to be made up to tax day (April 15, 2025 for the 2024 tax year). So if you didn't make contributions to a retirement account in 2024, there is still time to do so and potentially be able to claim the Saver's Credit when you file your federal income taxes. You'll need to file IRS Form 8880: Credit for Qualified Retirement Savings Contributions.

And remember, eligible retirement contributions may also be tax deductible, which can help lower your AGI. So you could potentially get the benefit of the tax deduction for your contribution as well as the tax credit. It's kind of a double reward for saving. If you need help with determining if you qualify for the Saver's Credit, check out the Internal Revenue Service's Interactive Tax Assistant. If you need more help with tax preparation, you may also qualify for free tax assistance from the IRS' Volunteer Income Tax Assistance (VITA) program.

The Saver's Credit can be a welcome extra if you qualify, but even if you don't there are other ways to give your savings a boost. First, make sure that saving is included in your budget. Then set up automatic monthly transfers from your checking account to a savings account to make it easy. Think of it as paying yourself first.

If you have a company retirement plan such as a 401(k), make sure you contribute enough to get any match. Upping your contribution by even a small percentage will increase your savings in the long run. If your company doesn't offer an employer-sponsored retirement plan, you may still be able to open an IRA and start making regular contributions (which you may also be able to make for a stay-at-home spouse). Also, look into a Health Savings Account (HSA) if you have a high deductible health plan. This is a great way to plan ahead for medical expenses, supplement retirement savings, and save on taxes.

Finally, whenever you get a windfall—a raise, a bonus, a tax refund, even a gift—consider putting some of it in savings. The amounts you save may seem small at first, but don't get discouraged. It will add up over time. Then take the next step and invest your savings to help it potentially grow faster. With both saving and investing, time and consistency are two of the key factors in achieving your goals. Stick with it!