When the Government Can Help Fund Your IRA: Finding the Silver Lining in a Down Year

I realize that sounds a little gimmicky, and there are a few criteria that must be met for this to work, but if you meet those criteria, then this is legit. The idea is to take advantage of the “Retirement Savings Contributions Credit” (aka the “Savers Credit”), a tax credit which is only available to low-income taxpayers who make IRA contributions.

Here’s how it can play out:

  • For whatever reason, your income is down significantly in a given year. Maybe you started a new business that isn’t yet off the ground, took some time off to travel between jobs, or stopped working to take care of a loved one
  • When you file your tax return at year-end, as long as you meet the requisite criteria (below), you are eligible for the Saver’s Credit. The exact amount you will get is based on your Adjusted Gross Income (AGI), as laid out in this table for single taxpayers (limited to a maximum credit of $1,000 for single filers and $2,000 for married taxpayers filing a joint return (“MFJ”)). The limitations are higher for MFJ taxpayers.
Your Adjusted Gross Income (AGI) – Single % of IRA Contribution to be Credited
Up to $19,000 50%
$19,001 – $20,500 20%
$20,501 – $31,500 10%
More than $31,500 0%


For example, if you (a single taxpayer) have an AGI of $15,000 and you make a $1,500 IRA contribution, you will get a tax credit of $1,500 x 50% = $750.

What criteria have to be met?

Other than the AGI limitations shown above, there are a few criteria that you have to meet for this to work:

  • The level of your earned income. Earned income is, literally, income that is earned. This means that it’s income from working (wages reported on a W-2, income reported on a 1099, etc.) and not portfolio income (interest, dividends) or passive income (rental real estate income, income from being a silent investor in a business). Why is this important? Because you can’t make an IRA contribution whose amount exceeds the amount of your earned income. So, if you had $1,000 in earned income for the year, your maximum IRA contribution would be $1,000. If you had $0 of earned income, you cannot make an IRA contribution for the year. This may be a deal-breaker for some people, but if your situation happens to line up, you can take advantage in a big way!
  • You have to have cash available that you’re comfortable putting aside until retirement. Why? Because you have to actually make the IRA contribution in order to get the credit. Just meeting the AGI and earned income requirements don’t help you if you don’t have the cash to contribute to your IRA (remember, the credit is equal to 50% of your contribution – the point of the credit is to encourage low income taxpayers to save for retirement and to give them an extra boost in the form of the credit). In some cases, this is an opportunity for parents or grandparents to make gifts to members of the younger generation to help fund these retirement savings and take advantage of this credit for a taxpayer that may not be comfortable putting aside cash for such a long-term investment
  • You must be 18 or older
  • You must not be a full-time student
  • You must not be claimed as a dependent on another person’s tax return

I’ve met the criteria and made the contribution, what is the quantifiable benefit that I receive?

That depends on your AGI and the amount that you contributed. The maximum benefit that you can get is $2,000, but you can get a lower amount based on the table above. To calculate your benefit, find your AGI range on the table and multiply the corresponding percentage times the IRA contribution that you made to calculate the credit.

Note that the Saver’s Credit is a non-refundable credit, which means that it can reduce your income tax liability, but not below $0.

Should I contribute to a traditional or a Roth IRA?

There are several factors that would go into this determination (e.g. income level, taxpayer’s age, expected return on investments), but in a year that finds you in a very low tax bracket, it would probably be more beneficial to make a contribution to a Roth IRA. While a traditional IRA gets you a deduction now, that deduction won’t be worth much in tax savings if you are in a low tax bracket and therefore have a low tax rate. However, a Roth IRA does not give you a deduction, but the funds in the Roth IRA will grow tax free forever, and the distributions you take in retirement will also be tax free. Given the low value of a deduction today (because of the low income and low tax bracket), a Roth contribution that can be tax free forever is likely the better option under these circumstances.


Not sure if this strategy is right for you? Unsure about something you read? Give us a call, we can help!

Disclaimer: The topics discussed in this article cover complex tax law. You should always consult your tax advisor before making any tax-planning decisions.