Financial Fellow

Written by J.P. Wicklein

     Assuming you meet certain requirements, the federal government will provide you with a tax credit as a result of your retirement savings contributions.   Known as the “Retirement Savings Contribution Credit”, this tax credit was designed to assist lower income individuals with saving for retirement.  If you qualify, you will be provided you with a tax credit of up to $1,000 for single filers and up to $2,000 for joint filers. 

Requirements to qualify for the Retirement Savings Contribution Credit

1)   Your adjusted gross income does not exceed $26,000 for single filers or $52,000 for joint filers. 

2)   You are not claimed as a dependent on someone else’s tax return.

3)   You are at least 18 years old at the end of the tax year. 

4)   You were not a full time student during the tax year.

5)   You made contribution(s) to any one of the following types of retirement accounts:  Traditional IRA, Roth IRA, 401(k), 403(b), SEP, SIMPLE plan, governmental 457, federal Thrift Savings Plan, or a 501(c)(18)(d) plan.

To determine your retirement savings contribution tax credit

1)   Locate the tax credit percent that corresponds to your adjusted gross income (Form 1040 Line 38) and filing status on the table below. 

2)   Multiply the corresponding tax credit percent by your retirement savings contributions for the tax year.  If your retirement savings contributions exceed $2,000 multiply the percent by $2,000.  (Note that if each joint filer were to contribute $2,000 toward retirement savings (a combined total of $4,000) the total credit received would be $2,000.)

Example 1

Jack, a single filer, had an adjusted gross income of $16,000 during 2007.   During the year he contributed $1,500 to a Roth IRA.  Multiplying Jack’s $1,500 contribution by his tax credit percent (20%) reveals that he is eligible for a $300 tax credit. 

Example 2

Beth and Tom, a married couple, are filing a joint tax return.  They had a combined adjusted gross income of $30,000 during 2007.  They each contributed $2,500 to their Traditional IRA accounts last year.  They are eligible for a combined $2,000 tax credit ($4,000 x 50%).  (Remember that each person is only eligible to receive a tax credit based on a maximum contribution of $2,000.)

How to receive the tax credit

     To receive the retirement savings contribution tax credit you will need to complete IRS Form 8880 and submit it along with your tax return.  The general instructions that accompany the form should answer any additional questions you may have. 

     Through the retirement savings contribution tax credit the federal government effectively gives you money to contribute to your retirement account.  The tax credit, combined with the tax advantages of your retirement account, provide strong financial incentive to save for retirement.  Setting aside money for retirement when you have a low to moderate income can be difficult but, the Retirement Savings Contribution Credit can make it well worth the effort.