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Do You Qualify for the Saver’s Credit?

Little-known tax break benefits low- and moderate-income workers who contribute to retirement plans

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A little-known tax credit could save low- and moderate-income earners $1,000 annually as they sock away funds for retirement.

The Retirement Savings Contribution Credit, commonly called the Saver’s Credit, is based on contributions to a qualified retirement plan, including a traditional or Roth IRA, 401(k), 403(b), 457(b), SIMPLE plan, SARSEP, 501(c)(18)(D) plan, and contributions made to an ABLE account for which you are the designated beneficiary.

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To qualify for the credit in the 2023 tax year, adjusted gross income (AGI) can’t exceed $73,000 for married couples filing jointly, $54,750 for head of household filers and $36,500 for any other filing status. The credit is a maximum $1,000 ($2,000 for joint filers if both spouses made qualifying retirement contributions).

Your AGI is the amount on line 11 of your 1040 form. As AGI rises, the tax credit phases out. Rollover contributions from an existing plan do not qualify for the credit.

Unlike a tax deduction, which reduces your taxable income, a tax credit reduces your taxes, dollar for dollar. If you owed $800 in federal income taxes and had a $700 credit, your tax bill would shrink to $100. The Saver’s Credit can reduce your tax bill to zero, but unlike some tax credits, it can’t turn a tax bill into a refund. If you owed $500 and had a $700 tax credit, your tax bill would be zero.

The IRS has an online tool to help you determine if you qualify for the Saver’s Credit.

Often overlooked

Only 47 percent of U.S. workers know about the Saver’s Credit, a 2023 survey by the Transamerica Center for Retirement Studies found. Far fewer use it, even among those at the qualifying income levels.

“So very few people claim it at the moment. It’s a little too complicated,” says Ida Rademacher, executive director of the Aspen Institute’s Financial Security Program. “But there’s still a real opportunity for households who are eligible for it, if they knew about it and would take advantage of it.”

According to a 2023 Congressional Research Service report, only 7 percent of taxpayers reporting an AGI of $25,000 to $50,000 and 15 percent with incomes of $50,000 to $75,000 claimed the Saver’s Credit in 2021.

“There’s a lot of money being left on the table,” says Dan Doonan, executive director of the National Institute on Retirement Security.

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One obstacle is that to claim the credit, taxpayers must fill out a separate IRS document, Form 8880, and submit it with their 1040 form. There’s no mention of this extra paperwork on the 1040, and lower-income people are less likely to have an accountant who will tell them about the credit, Doonan says.

“You’re making it administratively difficult,” he says. “If they don’t know about this ahead of time, they’re likely to miss it.”

Rademacher agrees. “These are extremely low-income households. When you look at a typical tax return, it’s a standard-deduction kind of process that they’re engaged in, usually,” she says. “So, the ability to even engage in a conversation about the credits — the nuance and complexity of itemizing your credits — is likely also a small proportion of the households that are in this income bracket that are really clued into these issues.”

Another reason so few people use the credit is that the income thresholds are so low. Someone earning less than $36,500 a year may find it extremely difficult to save $1,000 for retirement.

State ‘auto IRAs’ may help

Access to retirement savings plans — or, rather, the lack of it — presents another hurdle. Most workers earning less than $50,000 a year do not have access to a workplace retirement plan, a 2022 AARP study found.

One bright spot that might increase utilization of the Saver’s Credit is the rise of state-sponsored “work-and-save” programs, typically involving so-called auto IRAs.

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Under these programs, most employers that do not offer a retirement plan are required to enroll workers in state-facilitated retirement accounts and arrange for automatic payroll contributions, generally starting at around 3 percent of wages and rising annually up to a set maximum. The accounts are considered qualified retirement plans for the Saver’s Credit, making more taxpayers eligible.

These programs work because people are 15 times as likely to save if they have a payroll deduction option in the workplace, and 20 times as likely if that savings is automatic, AARP research has found. To date, with AARP support, 19 states have enacted auto IRAs or other work-and-save programs. Several bills before Congress aim to establish a federal automatic IRA.

Rademacher says the state programs can open retirement savings to a new population of taxpayers.

“It could be a real boost to a lot more households now, because of the way that the states have expanded their own retirement savings programs,” she says. “The fact that you’ve got all of these new retirement savers that have potentially never before saved for retirement, that would be just an ideal opportunity to start to publicize and potentially increase the usage of this credit among lower-income workers.”

A provision of the SECURE 2.0 Act of 2022, a federal law designed to expand retirement saving, will also make the Saver’s Credit accessible to more taxpayers by raising the income limit so more people qualify. SECURE 2.0 will also change the credit into a federal matching contribution deposited directly into your retirement account, and makes it refundable, meaning it can turn a tax bill into a refund. These changes take effect in 2027.

Using past tax return data, the Employee Benefit Research Institute estimates that 21.9 million people would be eligible for the Saver's Match, based on their income and contributions to a qualified retirement plan. That figure could be low, the institute says in a February 2024 report, because it only reflects taxpayers with W-2 wage income and not those whose earnings come primarily from contract or freelance work reported on 1099 forms.

Doonan and Rademacher note that retirement savings incentives are generally skewed toward higher-income earners, who can get a bigger tax break on, say, 401(k) contributions because they are in a higher tax bracket. The Saver’s Credit helps level the playing field a bit.

“Expansion of the Saver’s Credit is really targeted at helping low- and moderate-income persons to increase their savings for retirement,” says David Certner, legislative policy director at AARP.

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