Retirement Savings Contribution Credit

A boost for savers with moderate income

By Kaye A. Thomas
Updated January 6, 2008

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

This topic is covered in Chapter 15 of our book, Go Roth!

People with low to moderate income find it hard to save for retirement, so there's a special tax credit designed to help this particular group. If you qualify, and you can scrape together the money for a retirement savings contribution, Uncle Sam will provide a credit that can be as much as half of the amount you contributed. If you're eligible, you can claim this credit even if you received matching contributions from your employer!

Example: You contribute $1,000 to your company's 401k plan and get a matching contribution of $500, so you have a total of $1,500 in your account. If you qualify for the highest level of this credit, you get a $500 reduction in your taxes, so it cost you only $500 to add $1,500 to your retirement savings.

On your own

Congress didn't want to allow this credit for minors, full-time students or dependents. You're disqualified if any of the following are true for the year you want to claim the credit:

You were less than 18 years of age at the end of the year.*
You were a full time student. For this purpose, you're considered a full-time student if, during some part of five calendar months, you were enrolled for the number of hours or courses your school considers to be full-time.
Someone else claims an exemption for you on their tax return.

In any of these situations you may be eligible to make retirement savings contributions, and it may be a good idea for you to do so, but you won't qualify for the credit.

* If you were born on January 1, you're considered 18 as of the day before your 18th birthday, on December 31 of the preceding year, for purposes of this rule.

Income limits

There are income limits for this credit, depending on your filing status. In the following chart, "MFJ" means married filing jointly, and "HOH" means head of household. "Others" are single, married filing separately, or qualifying widow or widower. These are the numbers for 2008. Numbers for other years are available in our Reference Room.

	MFJ	HOH	Other
50% credit with income up to	$32,000	$24,000	$16,000
20% credit over that level, up to	$34,500	$25,875	$17,250
10% credit over that level, up to	$53,000	$39,750	$26,500

For example, if you're married filing jointly with income of $40,000, your credit will be 10% of the amount contributed, up to the limit described below. But if your joint income is $30,000, the credit will be a whopping 50% of the amount contributed.

Income: For this purpose, we're talking about your adjusted gross income, which is your income after taking certain deductions (such as a deduction for your IRA contribution), but before claiming personal exemptions, itemized deductions or the standard deduction. If you excluded income from foreign sources, you'll have to add that back when figuring this credit.

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