CRS Updates Fact Sheet on 'Saver's Credit'

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 is be indexed to inflation. The maximum credit is 50% of retirement contributions up to $2,000. This credit can reduce the amount of taxes owed, but the tax credit itself is non-refundable. The maximum credit is the lesser of either $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 (P.L. 109-280) makes the retirement savings tax credit permanent. Section 833 provides that for years after 2006, the eligible income brackets is to be indexed to inflation in increments of $500.

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. For individuals with adjusted gross incomes (AGI) under $15,000 and families with incomes under $30,000, 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

Data from the IRS indicate that the retirement savings tax credit was claimed on more than 5 million tax returns -- representing about 4% of all tax returns -- filed each year from 2002 through 2005. The average credit on tax returns filed for tax year 2002 was $200. The average retirement plan contribution on which the credit was claimed that year was $1,200. Thus, the average credit for tax year 2002 was equal to about 17% of the average amount contributed to retirement plans by taxpayers who claimed the retirement savings credit.