Question: Charles, a part-time student who lives at home with his parents, also works at Big Y Supermarket as a cashier. The company offers him a §401(k) plan, with an employer match. Charles loves guitars and wants to buy a new one, but his dad urges him to contribute as much as possible to the §401(k) plan while living at home. With an AGI of less than $20,000, and not his parents’ dependent, is there any added boost from the IRS to aid his savings plans?
Answer: Yes. The retirement savings contributions credit, (Form 8880, Credit for Qualified Retirement Savings Contributions) — also known as the saver’s credit — provides a government boost by offsetting part of the first $2,000 workers voluntarily contribute to individual retirement arrangements (IRAs), §401(k) plans and similar workplace retirement programs. Eligible taxpayers include anyone over age 17 at the end of the applicable year and who is not a full-time student or allowed as a dependent on another taxpayer’s return [IRC §25B(c)].
The credit is also available to eligible beneficiaries of an Achieving a Better Life Experience (ABLE) account who contribute to that account.
The maximum saver’s credit is $1,000 ($2,000 for married couples) or 50% of $2,000. For 2023, the credit maximum of 50% occurs for single taxpayers with AGI up to $21,750. The contribution percentage drops to 20% for AGI between $21,751 and $23,750, and then is 10% for AGI up to $36,500 after which it is completely phased out.
The IRS webpage on the retirement savings contributions credit has the full table for other filing statuses.
This credit is a nonrefundable credit that can offset tax including AMT and repayment of the advanced premium tax credit. Recent distributions from a retirement plan or ABLE account reduce the contribution amount used to figure the credit.
Workplace plans that qualify include:
- Traditional or Roth IRA
- §401(k) plan
- §403(b) plan for employees of public schools and certain tax-exempt organizations
- Governmental §457 plan for state or local government employees
- Thrift Savings Plan (TSP) for federal employees
