Certain taxpayers can qualify for an IRS tax credit when they save for their retirement in qualified accounts. When a worker puts money into a plan under 401(a), it may qualify for the credit. However, defined benefit plans under 401(a) that are funded by the employer do not qualify.
Retirement Savings Credit
The IRS offers a retirement savings credit to help defray some of the cost of saving for retirement for middle- and lower-income taxpayers. However, it is only available in a relatively narrow band of incomes that the IRS can change periodically. As of this publication, a saver can only qualify for it if his modified adjusted gross income is below $30,000 if he is single, $45,000 if he is a head of household or $60,000 if he is married and files jointly.
The value of the credit goes down the more a taxpayer makes annually. Taxpayers with low incomes get up to 50 percent of their contributions back as a credit. The credit drops to 20 percent and then 10 percent as the taxpayer's income increases. It can only be applied to the first $2,000 in net contributions that a person makes to their qualified accounts, giving it a maximum value of $1,000. In addition, the credit isn't refundable, so it can only be used to reduce what a taxpayer owes the IRS at the end of the year.
Whether or not a 401(a) plan qualifies depends on the type of 401(a) plan it is. Technically, any qualified pension plan is a 401(a) plan. This means that a 401(k) plan is also a 401(a) plan, kind of like how a square is also a rectangle. However, when a taxpayer uses 401(a) to refer to an employer-funded plan, such as a profit-sharing plan or an employer-funded defined benefit plan, the rules are a little different because he can't claim the credit for money someone else puts into his plan for him.
401(k) plans aren't the only types of plans that qualify for a saver's credit. Contributions to other workplace plans, such as 403(b) annuities, 457 plans or 501(c)(18) plans also count. In addition, money that a saver puts into a self-employed or small-business plan, such as a SIMPLE IRA or salary reduction SEP plan, can also qualify. Finally, a direct contribution made to an IRA or Roth IRA can also be partially offset with the credit.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.