A saver’s credit may be available to low- and moderate-income workers who save for retirement in a 401(k) or individual retirement account. Contributions to a traditional retirement account can earn you a tax deduction in addition to the retirement savings contributions credit.
You can qualify for the saver’s credit on your 2022 tax return by following these steps:
- Determine if your income qualifies you for the saver’s credit.
- Invest in a qualified retirement account, such as a 401(k) or IRA.
- Contribute enough to receive the full credit.
- Contribute by the deadline for the saver’s credit.
Eligibility for the saver’s credit based on your income
If an individual contributes to a retirement account, he or she could qualify for the saver’s credit up to $34,000 in 2022. As stated by Catherine Collinson, president of the Transamerica Center for Retirement Studies, workers who were not eligible for the saver’s credit in recent years may now qualify because unemployment, layoffs, and salary reductions have reduced their income.
As of 2022, heads of households will have a higher threshold for the saver’s credit at $51,000. In 2022, married couples can earn up to $68,000 and remain eligible for the saver’s credit.
Invest in a qualified retirement account, such as a 401(k) or IRA
Your retirement account might qualify for the saver’s credit if it fits specific criteria. A 401(k) may allow you to qualify for a saver’s credit. Additionally, 403(b) plans for public school employees, 457 plans for state and local government employees, SEP and SIMPLE plans, and the federal government’s Thrift Savings Plan, are eligible. There are other types of workplace retirement plans that are also eligible. It is not necessary to have a workplace retirement account to qualify for the credit. A saver’s credit may also apply if you contribute to an IRA, Roth IRA, or ABLE account in which you are a beneficiary.
Contribute enough to receive the full credit
An individual can claim the saver’s credit on retirement account contributions up to $2,000, and a couple can claim the credit on contributions up to $4,000. You might not be able to take advantage of the credit if you take distributions from your retirement account.
In most cases, 401(k) plans and similar workplace retirement accounts that qualify for the saver’s credit are due by the end of the calendar year. The saver’s credit is available until the due date of your tax return in April. To qualify for the 2022 saver’s credit, retirement savers must make traditional IRA or Roth IRA contributions by April 18, 2023.
You could receive a refund or reduce your tax bill by taking advantage of the saver’s credit, and it is generally better than a deduction in most cases.
An individual can claim up to $1,000 or a couple can claim up to $2,000 in credit. The average credit is minor, and it is often much less and, due to other deductions and credits, may even be zero for some taxpayers, according to the IRS.