Tax Credits for Contributing to the Roth IRA

by Craig Woodman

A Roth IRA, or individual retirement account, is an excellent savings tool for retirement. It offers tax advantages because any withdrawals made from the account after retirement age, 59 1/2 as of 2011, are tax-free. In exchange for this future tax benefit, the saver does not receive a tax deduction for Roth contributions -- unlike contributions to a traditional IRA, which are tax deductible. However, tax credits are available as an incentive for low- to moderate-income taxpayers.

Income Levels

For married people filing joint returns, the household adjusted gross income (AGI) must be less than $55,500 for a person to qualify for any amount of saver's credit. A head of household's income must not exceed $41,625, while a single taxpayer or married taxpayer filing separately must have less than $27,750 in order to qualify for the credit as of 2011.

Other Requirements

A taxpayer must be over 18 years old to qualify for the saver's tax credit and cannot be a full time student. Nobody else, such as a parent, can claim him as an exemption. A taxpayer must file either a Form 1040A or the long-form 1040 to claim the saver's credit, in addition to completing Form 8880, "Credit for Qualified Retirement Savings Contribution."

Credit Amounts

The maximum available credit is up to 50 percent of retirement plan contributions up to $2,000. It is available to married taxpayers with AGIs under $33,500 and heads of household with less than $25,125. Single taxpayers can take the maximum credit of $1,000 if they have less than $16,750 in AGI. The credits are gradually phased out as taxpayers earn more income. The credit first drops to 20 percent of the contribution up to the maximum, and then drops to 10 percent as the taxpayer earns closer to the maximum allowable AGI.

Other Considerations

If a person overlooked the saver's tax credit for a tax year, he may file an amended tax return, called a 1040X, for up to three years after the due date of the return. A filer can also contribute to a retirement plan until the filing deadline, April 15 for most people, and still take the credit on the taxes he is filing for the prior year.

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