2021 Saver’s Credit
INSIGHT ARTICLE |
You may be eligible for a valuable incentive, which could reduce your federal income tax liability for contributing to your company’s 401(k) plan. If you qualify, you may receive a retirement savings contributions credit, also known as the Saver’s Credit, of up to $1,000 ($2,000 for married couples filing jointly) if you made eligible contributions to a retirement savings plan. The deduction is claimed in the form of a nonrefundable tax credit, ranging from 10% to 50% of your annual contribution.
Remember, when you contribute a portion of each paycheck into the plan on a pretax basis, you are reducing the amount of your income subject to federal taxation. And, those assets grow tax-deferred until you receive a distribution. If you qualify for the Saver’s Credit, you may even further reduce your taxes. What is nice about the Saver’s Credit is that it is an actual tax credit—not merely a tax deduction. If you’re not sure how the two differ, a tax deduction simply subtracts the value from your taxable income, and you pay taxes on the remaining taxable income. A tax credit, on the other hand, actually gives you the entire dollar value back or subtracts the value from the taxes you owe—making it far more valuable monetarily than a deduction. In the case of the Saver’s Credit, it is nonrefundable, meaning it can only be subtracted from the taxes you owe, possibly down to zero, but it can’t provide you with a tax refund.
Your eligibility depends on your adjusted gross income (AGI) as reported on your annual Form 1040 filing, your tax filing status and your retirement contributions.
For the 2021 tax year, your adjusted gross income must be $33,000 or less to qualify for the credit if your filing status is single or married filing separately. To qualify for the credit, you must be age 18 or older and cannot be a full-time student or claimed as a dependent on someone else’s tax return.
Use this chart to calculate your credit for the tax year 2021. First, determine your AGI—your total income minus all qualified deductions. Then refer to the chart below to see how much you can claim as a tax credit if you qualify.
Retirement savings eligible for the credit
The Saver’s Credit can be taken for your contributions (or your spouse’s, if filing jointly) to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; or your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans. Contributions for purposes of the Saver’s Credit are capped at $2,000 per individual.
Rollover contributions (money that you moved from another retirement plan or individual retirement account) aren’t eligible for the Saver’s Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.
- A single employee whose AGI is $18,000 defers $2,000 to their retirement plan will qualify for a tax credit equal to 50% of total contribution. That’s a tax savings of $1,000.
- A married couple, filing jointly, with a combined AGI of $40,000 each contributes $1,000 to their respective company plans, for a total contribution of $2,000. They will receive a 20% credit reducing their tax bill by $400.
Consult Form 8880, Credit for Qualified Retirement Savings Contributions for more information. Please consult with your tax advisor before taking any action based on the information provided herein.
This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, insurance, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. Information has been obtained from a variety of sources believed to be reliable though not independently verified. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. Past performance does not indicate future performance. The sole purpose of this document is to inform, and it is not intended to be an offer or solicitation to purchase or sell any security, or investment or service. Investments mentioned in this document may not be suitable for investors. Before making any investment, each investor should carefully consider the risks associated with the investment and make a determination based on the investor’s own particular circumstances that the investment is consistent with the investor’s investment objectives.
Information in this document was prepared by Retirement Plan Advisory GroupTM and although information in this document has been obtained from sources believed to be reliable, RSM US Wealth Management LLC, Retirement Plan Advisory GroupTM and their respective affiliates do not guarantee its accuracy, completeness or reliability and are not responsible or liable for any direct, indirect or consequential losses from its use. Any such information may be incomplete or condensed and is subject to change without notice.
Tax and accounting services are provided by RSM US LLP, a registered CPA firm. Investment advisory, aggregated reporting, financial planning, retirement plan advisory and other wealth management services are provided by RSM US Wealth Management LLC, an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) and wholly owned subsidiary of RSM US LLP.
RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International.
RSM, the RSM logo and the power of being understood are registered trademarks of RSM International Association.
© 2021 RSM US LLP. All Rights Reserved.