The Retirement Savings Tax Credit: A Fact Sheet
The Retirement Savings Tax Credit:
A Fact Sheet
Patrick Purcell
Specialist in Income Security
Domestic Social Policy Division
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
authorized a non-refundable tax credit of up to $1,000 for eligible individuals who
contribute to an IRA or an employer-sponsored retirement plan. The credit was first
available in 2002, and as enacted in 2001, it would have expired after the 2006 tax year.
The Pension Protection Act of 2006 (P.L. 109-280) made the retirement savings tax
credit permanent. Beginning in 2007, the eligible income brackets were indexed to
inflation. The maximum credit is 50% of retirement contributions up to $2,000. The
credit can reduce the amount of taxes owed, but the tax credit itself is non-refundable.
The maximum credit is the lesser of $1,000 or the tax that the individual would have
owed without the credit. Eligibility is based on the taxpayer’s adjusted gross income.
Taxpayers under age 18 or who are full-time students are not eligible for the credit.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
authorized a tax credit to encourage low- and moderate-income families and individuals
to save for retirement.1 Eligible taxpayers who contribute to an individual retirement
account (IRA) or to an employer-sponsored plan that is qualified under §401, §403 or
§457 of the tax code can receive a non-refundable tax credit of up to $1,000. This credit
is in addition to the tax deduction for contributing to a traditional IRA or to an employer-
sponsored retirement plan. In determining the amount of the credit, neither the amount
of any refundable tax credits for which the taxpayer is eligible nor the adoption credit are
taken into consideration. The retirement savings credit was first available in 2002, and
as enacted in 2001, it would have expired after the 2006 tax year. Section 812 of the
Pension Protection Act of 2006 (PPA, P.L. 109-280) made the retirement savings tax
credit permanent. Section 833 of the PPA provided that for years after 2006, the eligible
income brackets will be indexed to inflation in increments of $500.
1 The retirement savings tax credit is authorized in the Internal Revenue Code at 26 U.S.C., §25B.
Taxpayers claim the credit on their federal income tax returns. Taxpayers who
contribute up to $2,000 (for all plans combined) to a traditional IRA, a Roth IRA, or an
employer-sponsored retirement plan receive a credit that reduces the amount of income
tax they owe. The maximum credit is the lesser of $1,000 or the amount of tax that would
have been owed without the credit. The amount of the credit declines as income
increases. In 2008, for individuals with adjusted gross incomes (AGI) under $16,000 and
married couples with incomes under $32,000, the credit is 50% of contributions up to
$2,000 for a maximum credit of $1,000. (See Table 1.) Because the credit is based on
AGI, it increases the net benefit of contributing to a retirement plan. For example, a
married couple filing jointly with income of $32,000 who contribute $2,000 to a §401(k)
plan would reduce their taxable income to $30,000 and qualify for a $1,000 tax credit.
The net effect is that the $2,000 contribution to the 401(k) plan costs them only $1,000.
Table 1. Credit Amounts for the Savers’ Credit in 2008
Filing Status and Adjusted Gross Income
Amount of CreditHead ofMarried,
SingleHouseholdFiling Jointly
$1 to $16,000$1 to $24,000$1 to $32,00050% of contribution up to $2,000($1,000 maximum credit)
$16,001 to$24,000 to$32,001 to20% of contribution up to $2,000
$17,250$25,875$34,500($400 maximum credit)
$17,251 to$25,876 to$34,501 to10% of contribution up to $2,000
$26,500$39,750 $53,000($200 maximum credit)
More thanMore thanMore than
$26,500 $39,750 $53,000 Ze ro
The credit is not available to taxpayers under age 18 or to full-time students. If a
worker or spouse receives a pre-retirement distribution from a retirement plan (such as
a hardship withdrawal), any credit taken in that same year and in the two subsequent years
will be reduced by the amount of the distribution. For example, if an individual took a
$1,000 hardship withdrawal in 2005 and qualified for a $500 credit for that year, $500 of
the hardship withdrawal would offset the $500 credit in 2005. The remaining $500 of the
hardship withdrawal would offset any credits (up to $500) in 2006 and 2007. Because it
is non-refundable, some families may not benefit from the retirement savings tax credit
because they have no net income tax liability. Also, the credit may not be large enough
to provide a savings incentive for families with incomes near the upper limits. For
families in the highest income bracket that qualifies for the credit, the maximum credit
is $200 for a contribution of $2,000. On the other hand, families that increase their saving
to claim the retirement savings credit and who are eligible for the earned income tax
credit (EITC) may increase the amount of the EITC for which they qualify.
Data from the IRS indicate that the retirement savings tax credit was claimed on
about 5.3 million tax returns — 4% of all tax returns — filed each year from 2002 through
2005. The average annual credit was $190. The average retirement plan contribution on
which the credit was claimed was $1,200. Thus, the average credit was equal to about
16% of the average amount contributed to retirement plans by taxpayers who claimed the
retirement savings credit.