Funding a personal savings plan is not always a priority, and many taxpayers may feel their income should go toward more immediate needs. However, there is an added incentive to save for retirement in the form of a non-refundable tax credit known as "the saver's tax credit". Because this credit is in addition to any tax deduction received for contributions made to a Traditional IRA, it helps to reduce the taxpayer's tax liability to the IRS.
Saver's Tax Credit Defined
The saver's credit is a non-refundable tax credit available to eligible taxpayers who make salary-deferral contributions to their employer sponsored or governmental savings plan or IRA. The credit is between 10 to 50% of the individual's eligible contribution of up to $2,000, which means it cannot be more than $1,000. Further, the maximum credit amount is the lesser of either $1,000 or the tax amount the eligible taxpayer would've had to pay without the credit. The saver's credit can be used to offset the individual's or married couple’s regular income-tax liability.
To be eligible for the credit, the individual or married couple’s adjusted gross income (AGI) must not exceed the following limits:
| 2009 |
| Credit Rate |
Married and files a joint return |
Files as head of household |
Other category of filers |
| 50% |
Up to $33,000 |
Up to $24,750 |
Up to $16,500 |
| 20% |
$33,001 – $36,000 |
$24,751 – $27,000 |
$16,501 – $18,000 |
| 10% |
$36,001 – $55,500 |
$27,001 – $41,625 |
$18,001 – $27,750 |
| 0% |
$55,501+ |
$41,626+ |
$27,751+ |
As you can see from the chart above, the lower the individual's AGI, the higher the saver's credit, which helps increase the incentive for lower-income taxpayers to fund their retirement accounts.
The following examples further explain the benefits of the credit:
Example #1:
Jane, whose tax-filing status is 'single', has an AGI of $16,500 for tax year 2009. Jane contributed $800 to her employer sponsored 401(k) 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 $27,750, she would not be eligible for the credit.
Example #2:
Susan and John are married and file their federal income-tax return jointly. For 2009, their adjusted gross income would have been $34,000 if they had not made any retirement contributions. During 2009, Susan elected to have $2,000 contributed to her employer's 457 plan. John made a deductible contribution of $2,000 to an IRA for 2009.
As a result of these contributions, their 2009 adjusted gross income is $30,000. If they had not made the $4,000 contribution, their income tax would have been about $4,260. By making the contribution, their income tax is reduced to about $3,660 and they are eligible for a credit of $800. Thus, by saving $4,000 for their retirement, Susan and John have also reduced their taxes by $1,400.
Be sure to check out the new beneficiary* section on the last page of your next quarterly or electronic statement. You will see the most current beneficiary on file electronically with the Plan. If you have not designated a beneficiary, need to make changes or you had completed a Beneficiary Designation Form prior to the Plan conversion to ING (previously Citistreet), you will find the steps to update this important information. When you have life events, such as marriage, divorce, or the birth or death of a family member, remember to re-evaluate and update (if necessary) your beneficiary designation.
*Beneficiary: the person who will receive any money that is left in your deferred compensation account when you pass away.