The Saver's Credit is a federal tax credit for contributing to a retirement account, and is worth up to $1000 for singles and $2000 for MFJ (married filing jointly).

Who Is Eligible?

From IRS Publication 590-A

Can you claim the credit?
If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply.

  1. You were born before January 2, 2001.
  2. You aren’t a full-time student (explained later).
  3. No one else, such as your parent(s), claims an exemption for you on their tax return.
  4. Your adjusted gross income (defined below) isn’t more than:
  • $63,000 if your filing status is married filing jointly;
  • $47,250 if your filing status is head of household; or
  • $31,500 if your filing status is single, married filing separately, or qualifying widow(er).

You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either:

  • A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance; or
  • A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government.

You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full time.

Sorry full time students, you're not eligible.

Even though they don't use the term modified AGI here, they do require you to make some adjustments to your AGI for the purposes of this credit (which won't affect most people)

Adjusted gross income.
This is generally the amount on line 7 of your 2018 Form 1040; or line 35 of your 2018 Form 1040NR. However, you must add to that amount any exclusion or deduction claimed for the year for:

  • Foreign earned income,
  • Foreign housing costs,
  • Income for bona fide residents of American Samoa, and
  • Income from Puerto Rico.

What Retirement Plan Contributions Qualify?

Again from Publication 590-A

Eligible contributions.
These include:

  1. Contributions to a traditional or Roth IRA;
  2. Salary reduction contributions (elective deferrals, including amounts designated as after-tax Roth contributions) to:

a. A 401(k) plan (including a SIMPLE 401(k)),
b. A section 403(b) annuity,
c. An eligible deferred compensation plan of a state or local government (a governmental 457 plan),
d. A SIMPLE IRA plan, or
e. A salary reduction SEP; and

  1. Contributions to a section 501(c)(18) plan.

They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. For purposes of the credit, an employee contribution will be voluntary as long as it isn’t required as a condition of employment.

So basically, any contribution you choose to make to virtually any retirement account, aside from a non governmental 457(b) (and if you have access to one, you probably also have access to a 401(k) or 403(b)).

How Much of Your Contribution Qualifies?

First we're going to need to define "testing period"

Testing period.
The testing period consists of the year for which you claim the credit, the period after the end of that year and before the due date (including extensions) for filing your return for that year, and the 2 tax years before that year.

I'm not 100% sure on what they mean by "including extensions." I believe it means October 15th only if you filed for an extension, and April 15th if you did not. So assuming that's true, for tax year 2018, the testing period for someone who didn't file for an extension would be 2018 + Jan 1, 2019 to April 15, 2019 + 2017 and 2016, for a total period of January 1, 2016 to April 15, 2019.

Now that we understand the testing period, we can examine when we have to reduce these eligible contributions

Reducing eligible contributions.
Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included above under Eligible contributions. Also reduce your eligible contributions by any distribution from a Roth IRA that isn’t rolled over, even if the distribution isn’t taxable.
Don’t reduce your eligible contributions by any of the following.

  1. The portion of any distribution which isn’t includible in income because it is a trustee-to-trustee transfer or a rollover distribution.
  2. Distributions that are taxable as the result of an in-plan rollover to your designated Roth account.
  3. Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if:

a. The distribution is made before the due date (including extensions) of your tax return for that year,
b. You don’t take a deduction for the contribution, and
c. The distribution includes any income attributable to the contribution.

  1. Loans from a qualified employer plan treated as a distribution.
  2. Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals).
  3. Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k).
  4. Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA.
  5. Distributions from a military retirement plan.
  6. Distributions from an inherited IRA by a nonspousal beneficiary.

Distributions received by spouse.
Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit.

In short, aside from rollovers, any distribution from a retirement account made during the testing period reduces your eligible contribution for the credit. This includes withdrawals of your principal from a Roth IRA, which are never subject to early withdrawal penalties.

That is worth repeating: even though there is no penalty to withdraw your contributions from a Roth IRA, no matter how old you are or how long the IRA has been established, it will still cost you more in taxes if you would have otherwise qualified for the Saver's credit.

For example, suppose in 2018 you withdrew $15,000 of contributions from a Roth IRA because you had a financial emergency. Additionally, in each of the following years, you contribute the maximum to an IRA (which is $6000 currently, and might go up to $6500 within the next couple years), all while being married and having a joint income less than $63,000. You cannot claim the Saver's Credit again until the 2021 tax year, because you have to reduce your eligible contributions by $15,000.

And finally, the eligible contribution is subject to a maximum of $2000

Maximum eligible contributions.
After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person.

How Much Is The Credit?

It is worth either 10%, 20%, or 50% of your eligible contribution, depending on your income, courtesy of the IRS

Unfortunately, per Pub 590-A, this is a non-refundable credit (in short, if your tax liability is less than the sum of your non refundable credits, you don't get the full value of the credits).

Maximum credit. This is a nonrefundable credit. The amount of the credit in any year can’t be more than the amount of tax that you would otherwise pay (not counting any refundable credits) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the credit for child and dependent care expenses, then you won’t be entitled to this credit.

It should be noted that it is incredibly unlikely to get the maximum value of this tax credit.

For a single filer, an AGI of $19,000 in 2018 would result in a taxable income of just $7000 ($12,000 standard deduction), which would all be taxed at 10%, for a tax liability of $700. A $2000 contribution to a Roth IRA would result in a $1000 Saver's Credit, but because this credit is non-refundable, the credit's value is actually only $700.

At the lower tax brackets, the bracket width gets doubled for MFJ, so we have the same conclusion that a married couple can't maximize this credit. An AGI of $38,000 would result in a taxable income of $14,000 ($24,000 standard deduction), which would all be taxed at 10%, for a tax liability of $1400. Each individual has a maximum eligible contribution of $2000, so if they each contribute $2000 to a Roth IRA, they would be eligible for a total of $2000 in Saver's Credits ($1000 from each spouse's contributions). However, because the tax credit is non refundable and their tax liability is only $1400, their tax liability merely gets reduced to zero and they do not receive the remaining $600.

I remember reading somewhere on the rare situation where a single individual can get the full $1000 credit, but I can't remember the details. I believe it had something to do with the Alternative Minimum Tax, which is a post all on its own.

Earning More Could Increase Your Taxes Due

If you are close to one of the thresholds above - e.g. you expect to earn close to $19,250 as a single person in 2019, or you expect to earn close to $41,500 as a MFJ couple in 2019, then earning more than the threshold will drop your Saver's Credit by a significant amount and could result in you owing more taxes.

For example, suppose in 2018 you are single and paid $9.30/hr, and your normal work schedule calls for 40 hours a week. Assuming 50 weeks of work in a year (because of holidays), that's 2000 hours of work, which is an income of $18,600.

But you want to earn some extra money, and you pick up some extra shifts. By December, you've worked an extra 25 hours, which is paid at 1.5x because it was overtime pay. This extra 25*$9.30*1.5 = $348.75 in income would result in a total income of $18,948.75.

You contributed $1000 to a Roth IRA. If you didn't pick up any extra shifts through the end of the year, then the tax liability would be $695, but your $1000 IRA contribution triggers the Saver's Credit at the 50% level, reducing your tax bill by $500 (50% of your $1000 contribution) to $195.

But suppose you picked up an extra shift and worked an extra 8 hours. You earn an extra $9.301.58=$111.60, so your total income is $19,060.35. And lets suppose you put all this extra money into your Roth IRA, so your eligible contribution for the Saver's Credit is now $1111.

Unfortunately, because you earned more than $19,000 in 2018, you only get a credit of 20% of your $1111 contribution, which is $222. Your tax liability before the credit is $706, so after the tax credit your tax bill is now $484.

Let's look at this again: even though you earned an extra $111.60 by working an extra 8 hour shift, and even put all that money into your Roth IRA to increase your eligible contribution for the Saver's credit, you increased your tax bill by $289! By working more you actually made $177.40 less after taking taxes into account.
To be clear, this only occurs at the break points in the credit amounts. You can look at the graph below to see at what point you'll make more net of taxes again. This is for a single person in the 2019 tax year. For MFJ, double everything on this chart. I assume that the taxpayer is contributing enough to the IRA to maximize the Saver's credit, and that the taxpayer has no other deductions or credits.


The second inflection point for the taxes owed line that is not labeled is at an AGI of $20,750.

And then we can look at the income side. I've graphed net income (gross income less taxes) and take home pay (take home pay less retirement account contribution).


And here we can see more clearly how at the inflection points of $19250, $20750, and $32000, earning extra money will decrease your net income for a brief period, until you're able to overcome to loss of part of the Saver's Credit.