Uncle Sam’s Retirement Matching Program For Residents

“The Retirement Savings Contribution Credit” – never heard of it, right?  This little known tax credit can provide further incentive to fund retirement plans for a segment of medical residents. Let’s find out if you might qualify. 

What is this “Savers Credit”?

The Saver’s Credit is a tax incentive for low-to-moderate income earners who are saving for retirement.  This benefit is IN ADDITION to other tax benefits received for making retirement contributions. However, many people do not take advantage of this credit because they just don’t know about it.  

Who qualifies for the Credit?

You are eligible for this credit if you:

• are 18 or older
• not a full-time student
• are not claimed as a dependent on someone else’s tax return
• make a retirement plan (401k, 403b, 457, etc) or IRA contribution in the current tax year
• fall under the maximum AGI (adjusted gross income) limits set by the IRA

And, lastly, any contributions must be made with “new money” – so a rollover contribution would not qualify.

What are the Income Limits?

For 2019, these limits are (per the IRS website):

How the math works

Depending on your savings amount and tax filing status, the maximum credit you can receive (per individual) is $1,000 (up to $2,000 if married filing jointly).  You can claim the credit for 50%, 20% or 10% of the first $2,000 in contributions made (or $4,000 if married filing jointly). That math works out to a maximum credit of (single/married):

• $2,000 x 50% = $1,000 / $4,000 x 50% = $2,000
• $2,000 x 20% = $400 / $4,000 x 20% = $800
• $2,000 x 10% = $200 / $4,000 x 10% = $400

How does this apply to you?

Unfortunately, most first year residents will not qualify for the credit because they will be considered a student. However, residents in later years may be eligible. For example, a married 2nd year resident with a stay-at-home spouse is likely to qualify.

Refundable vs non refundable credit

Tax credits are designed to reduce your tax liability dollar for dollar – but not all tax credits are created equally.  As is the case with the Saver’s Credit, the majority of credits are “non-refundable”.  This means that the credit can reduce a taxpayer’s liability to zero – but not below zero (cannot result in a refund).  With a “refundable” credit, on the other hand, you receive the entire credit even if you end up with a greater refund.

Here’s an example of how a refundable credit works: your tax liability is $1,500 and you are eligible for a $2,000 credit.  You will receive the full $2,000 credit, resulting in a $500 ($2,000 – $1,500) refund.  Using this same example but assuming it’s a non-refundable credit: the $2,000 credit would reduce your tax liability from $1,500 to $0, but would NOT result in a refund.  That $500 would essentially be forfeited. 

Next Steps

Make sure it goes on your tax return!  This information goes on Form 8880 and gets added to your 1040.  Still have questions?  We are more than happy to help!  Just give us a call.