"Saver's Credit" for Low-Income Contributors

EGTRRA provides an annual nonrefundable credit against an individual's income tax for contributions to an IRA or a 401(k)-type plan of up to $2,000. (However, in figuring the credit, taxpayers must subtract from those contributions any distributions they have received from such plans in the last three years.) The credit is subject to income limits, and it supplements--rather than substitutes for--the tax incentive of being able to deduct or exclude a contribution to a traditional account from taxable income (see the table). Furthermore, claiming the credit for contributions to a Roth account does not jeopardize the tax-exempt status of withdrawals from those accounts. The credit took effect in 2002 and is scheduled to expire in 2006.

Features of the "Saver's Credit"
Credit
Rate
(Percent)		 Maximum
Credit
(Dollars)		 Income Range (Dollars)
Single Married
Filing Jointly		 Head of
Household
50 1,000 0 to 15,000 0 to 30,000 0 to 22,500
20 400 15,000 to 16,250 30,000 to 32,500 22,500 to 24,375
10 200 16,250 to 25,000 32,500 to 50,000 24,375 to 37,500
None 0 Over 25,000 Over 50,000 Over 37,500

The nonrefundability of the credit greatly limits the extent of the saving incentive it provides. The only taxpayers who might owe enough in taxes to claim the maximum credit of $1,000 are married taxpayers with no children and income between $23,850 and $30,000. For all other taxpayers in the 50 percent credit bracket, their saver's credit would be limited to the amount of their tax liability.