Retirement Savings Contribution Credit

A boost for savers with moderate income

By Kaye A. Thomas
Updated January 6, 2008

Schedule D made easy

Details on a credit some taxpayers can claim when they contribute to an IRA or 401k.

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Eligible contributions

What types of retirement contributions qualify? Plenty. You can put money into any of the following:

A traditional or Roth IRA
A 401k plan or 403b annuity
A governmental 457 plan
A SIMPLE IRA plan or salary reduction SEP
A 501(c)(18) plan

You can also count after-tax employee contributions to a qualified retirement plan or 403b annuity, but only if the contributions are voluntary. In all cases, your contribution has to be "new money." Rollover contributions don't count.

Maximum amount. The maximum contribution amount for this credit is $2,000 per person. For example, if you contribute $3,000 and qualify for the 10% credit, your credit will be $200 because only the first $2,000 of contributions count. This limit applies after the reduction for distributions described next.

Reduction for distributions

The idea behind the credit is to help you build retirement savings, so the credit doesn't apply if you're taking money out at the same time you're putting it in. In fact, when you figure the credit you have to reduce your eligible contributions by the amount of distributions you received during a "testing period" consisting of the year for which you're claiming the credit, the period after the end of that year until the due date (including extensions) of your tax return for that year, and the two years before that year. Certain types of distributions don't count: distributions that are rolled over to another retirement plan, or corrective distributions, for example. But if you file jointly with a spouse who took retirement plan distributions, you may also have to reduce your contributions by those distributions when figuring the credit. Bottom line: check these rules carefully if you or your spouse took any distributions from retirement plans during the testing period.

It's nonrefundable

This is a "nonrefundable" credit. That means you can't use it to get a refund that's bigger than the amount of tax you paid through withholding or estimated tax payments. In other words, if you're already paying zero tax, you can't use this credit to pay less than zero. However, you can use the credit to increase the amount of your refund, if it isn't as big as the amount that was withheld.

Example: Your total income tax withholding for the year was $800, and before you figure this credit you're expecting a refund of $500. That means you can't claim more than $300 credit (boosting your refund to $800, the amount of your withholding) even if you would otherwise qualify for a larger credit.

Credit is now permanent

Originally this credit was to expire after 2006, but Congress made it permanent in the Pension Protection Act of 2006.

Forms and publications

To claim this credit you have to file Form 8880 (click here for PDF file). The instructions come attached to the form. For further explanation, see chapter 4 of IRS Publication 590, Individual Retirement Arrangements (click here for large PDF file).