Tax season is now underway. But as in years past, millions of taxpayers are probably still missing out on the chance to slash their tax bill by as much as $2,000 simply because they overlook a little-known federal tax credit.
It’s called the retirement savings contributions credit, or the saver’s credit.
If you’re eligible for it, this credit is worth 10% to 50% of your retirement account contributions. The maximum dollar amount of the credit is $1,000 — or $2,000 for married people filing joint tax returns.
And yet, only 48% of full- and part-time workers are aware of this credit, according to a new survey from the Transamerica Institute, a nonprofit arm of Transamerica Life Insurance Co.
Members of the generation closest to retirement are the least likely to know about the saver’s credit, with only 26% of baby boomers reporting awareness of it. Members of Generations X and Z (both 46%) and millennials (63%) were more likely to know of the credit.
Your eligibility for the saver’s credit depends largely on your income.
To be eligible for the credit during the 2021 tax year — the one for which your return is due in April 2022 — you must:
- Have an adjusted gross income of no more than $66,000 if your tax-filing status is married filing jointly, $48,500 if your status is head of household or $33,000 for all other taxpayers.
- Be an adult who is not a full-time student and not claimed as a dependent on someone else’s tax return.
- Contribute to an eligible retirement plan (listed below).
The percentage of your retirement contributions that are eligible for the saver’s credit also depends on your income and tax filing status. Visit the IRS’ saver’s credit webpage for a breakdown.
Contributions to the following types of retirement plans are eligible for the saver’s credit:
- Traditional individual retirement account (IRA)
- Roth individual retirement account
- 401(k) plan
- 403(b) plan
- Governmental 457(b) plan elective salary deferral contributions
- SARSEP plan elective salary deferral contributions
- SIMPLE plan elective salary deferral contributions
Additionally, as of 2018, contributions to an Achieving a Better Life account make the account’s designated beneficiary eligible for the saver’s credit. ABLE accounts are a type of tax-advantaged savings account for people with disabilities (the designated beneficiaries).
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