Retirement Savings Contribution Credit

Lesson: Retirement Savings Contribution Credit

In this lesson, Nick Palazzolo, CPA, unravels the intricacies of the Retirement Savings Contribution Credit—affectionately known as the Savers Credit. As a non-refundable tax credit, it is specifically designed to encourage individuals on the lower end of the income scale to invest in their retirement savings. Nick clearly outlines the qualifying criteria, such as age, student status, and dependency, required to utilize this credit. Illustrating with an example, he demonstrates how to calculate the credit amount based on maximum contributions and adjusted gross income (AGI) levels. Furthermore, Nick details why the credit cannot result in a refund beyond reducing the tax liability to zero, emphasizing the credit's specific aim to aid taxpayers with lower incomes in bolstering their retirement funds.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Retirement Savings Contribution Credit, also known as the Savers Credit. This is going to be a non-refundable tax credit designed to encourage lower income individuals to save for retirement. Let's think about what's the rationale, the IRS rationale. Well, generally, more retirement savings, more investing happens, the more, just statistically speaking, the more income someone has. So the IRS, the government wants to incentivize those with lower incomes, those middle class, lower class, unfortunately with less money to save, invest in their retirement. Provides a credit for eligible taxpayers who contribute to qualified retirement accounts such as IRAs or 401ks. We got contribution limits. The credit is calculated based on contributions up to $2,000 for individuals. The credit percentage depends on the taxpayer's AGI and ranges from 10% to 50%. For single filers, no credit is available if the AGI is over that annually adjusting threshold for this. We got a few requirements. You must be at least 18 years old, not a full-time student, and not a dependent of another taxpayer. So for adults, some credits are for children, dependents. This is going to be mostly for an adult, not independent. Let's assume a single filer with an AGI of $20,000 contributes $1,500 to a traditional IRA. And for the year, we're going to assume an AGI cap of $32,500. First step, we're going to determine the applicable credit percentage based on the AGI. Now for a single filer with an AGI of $20,000, the credit percentage is 50%. Next, we want to calculate the credit amount. We're going to take the $1,500 contribution amount times the 50% credit percentage, and that is going to give us $750. What does that mean? In this example, the taxpayer would be eligible for a $750 retirement savings contribution credit, what a

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