3648 / What is the saver’s credit and who can claim it?

Editor’s Note: The 2017 Tax Act modified the rules governing ABLE accounts to permit a contributing beneficiary to claim the saver’s credit for tax years beginning after 2017 and before 2026. See Q 386 to Q 389. Under the SECURE Act 2.0, the existing saver’s credit will be replaced by a 50 percent matching contribution from the federal government (the match will be deposited into existing 401(k)s and IRAs). That matching contribution will be limited to $2,000 and will also be subject to phase out based on income levels. This provision becomes effective in 2027.

The saver’s credit (formally known as the retirement savings contributions credit) permits certain lower-income taxpayers to claim a nonrefundable credit for qualified retirement savings contributions.¹ Qualified retirement savings contributions include contributions to Roth or traditional IRAs, as well as elective deferrals to a 401(k) plan ( Q 3752), an IRC Section 403(b) tax sheltered annuity ( Q 4030), an eligible Section 457 governmental plan ( Q 3584), a SIMPLE IRA ( Q 3706), and a salary reduction SEP ( Q 3705). Voluntary after-tax contributions to a qualified plan or Section 403(b) tax sheltered annuity are also eligible for the credit.² The fact that contributions are made pursuant to a negative election (i.e., automatic enrollment) will not preclude a participant from claiming the saver’s credit.³ Contributions made to an IRA that are withdrawn, together with the net income attributable to such contribution, on or before the due date (including extensions of time) for filing the federal income tax return of the contributing individual are not considered eligible contributions.⁴

To prevent churning (simply switching existing retirement funds from one account to another to qualify for the credit), the total of qualified retirement savings contributions is reduced by certain distributions received by the taxpayer during the prior two taxable years and the current taxable year for which the credit is claimed, including the period up to the due date (plus extensions) for filing the federal income tax return for the current taxable year. Distributions received by the taxpayer’s spouse during the same time period are also counted if the taxpayer and spouse filed jointly both for the year during which a distribution was made and the year for which the credit is taken.⁵

Corrective distributions of excess contributions and excess aggregate contributions
( Q 3808), excess deferrals ( Q 3760), dividends paid on employer securities under Section 404(k) ( Q 3824), and loans treated as distributions ( Q 3949) are not taken into account.⁶