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Directing IRS Tax Refunds Toward Retirement Could Be Beneficial Tax-wise

May 9, 2017

The IRS has issued nearly 100 million refunds so far this year. On an average, American taxpayers are receiving approximately $2,700 per person. A tax refund is a lump sum payment that may be of a significant amount. It is highly recommended to use it wisely on a priority basis, such as paying off high interest debt/loans, and saving for a major financial goal, like purchasing a house or retirement funding.

As a U.S. taxpayer, directing your tax refund toward retirement may be a good decision as you could qualify for the ‘Saver’s Credit’. Here is what you need to know about this tax credit.

IRS Saver’s Credit or Retirement Savings Contributions Credit

In addition to other tax benefits you receive from investing in retirement savings, low to middle-income taxpayers may qualify for the Saver’s Credit (formerly called the Retirement Savings Contribution Credit). Contributions into a 401(k), Individual Retirement Account (IRA), 403(b) and other similar qualifying retirement accounts not only reduce your taxable income, but also may qualify for the Saver’s Tax Credit. In addition, even contributions to Roth IRA account may qualify.

So, what is this Saver’s Credit?

The Saver’s Credit is a non-refundable tax credit, claimable on contributions made into a qualifying retirement plan, such as a 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; or IRA or Roth IRA.

Contributions made toward a rollover retirement account do not qualify for the Saver’s Credit.

What is the Saver’s Credit amount?

A qualifying taxpayer may claim 50%, 20% or 10% of a contribution (up to $2,000 for single taxpayers, $4,000 for married filing jointly) made toward the retirement plan.

The deductible amount depends on the qualifying taxpayer’s adjusted gross income (AGI). For the tax year 2018, the amounts are as follows:

US AGI Table for Savers Credit
2018 Adjusted Gross Income Limit for Savers Credit


How does a taxpayer qualify for the Saver’s Credit?

If you are a U.S. taxpayer, above age 18, and saving into a retirement plan and your AGI is within any of the above-mentioned limits for your taxable income bracket, you may qualify for the Saver’s Credit. However, the claimant can not be a full-time student, and/or claimed by another person on their tax return as a ‘dependent’.


Example Scenario

Jill, is a full-time worker at a retail store, while her husband is unemployed. They file their tax return as ‘married filing joint’. Jill made contributions amounting to a total of $1,000 toward her IRA and 401(k). Their adjusted gross income for the tax year 2017 is $37,000 after deducting Jill’s retirement savings contributions.

Based on the AGI limits mentioned above, Jill qualifies for 50% saver’s credit, i.e. $500 (50% of $1,000 contribution).

Direct Deposit of Your Tax Refund toward Retirement Plan

Currently, the U.S. Internal Revenue Service (IRS) allows taxpayers the option to have their refund directly routed toward their bank or retirement account. You can have your refund (or part of it) directly deposited to a traditional IRA, Roth IRA, or SEP-IRA, but not a SIMPLE IRA.

Note that, you must establish the IRA at a bank or other eligible financial institution before you request direct deposit. Make sure your direct deposit will be accepted. You must also notify the trustee or custodian of your account of the year to which the deposit is to be applied.

The direct deposit option reduces the refund wait period, and helps prevents theft, which is possible in case of refund checks deposited in mailboxes.

In order to opt for IRS’s direct deposit option, the taxpayer needs to file Form 8888, Allocation of Refund (Including Savings Bond Purchases). Along with filing Form 8888, the taxpayer should complete the refund section at the bottom of the Form 1040. The taxpayer needs to provide their bank’s routing number, and check the necessary box, such as Box ‘c’ for savings or checking account.

However, precaution should be taken to verify the routing number with the bank before adding it to the tax return, since at times the routing number mentioned on the check and the routing number for direct deposit may vary.

The Saver’s credit was introduced as an incentive for mid to low income earners to start saving for their retirement, specifically into qualified plans. If you think you qualify for the Saver’s credit, have no significant liability, and intend to have your retirement goal covered at the earliest, it is highly recommended that you consider directing your tax refund toward retirement.

Final Consideration

On a final note, a tax refund is not a bonus from the IRS. It is your money. A big refund is not necessarily a good thing as it means you are having too much tax withheld from your paystub. Rather than a $2,400 refund at the end of the year, you could have $200 per month extra in your pocket by reducing your tax withholding. This extra money could be used to increase your mortgage payments, contribute to savings or funding your retirement on a monthly basis. Learn more about estimating monthly U.S. tax withholding and advance tax payments.



If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.

Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.

We can assist with:

  • Canadian Personal and Corporate Tax Returns
  • Cross Border Taxation and Business Planning
  • US Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement Planning
  • Estate Planning, Inheritance Tax Advice

To obtain a quote or to arrange for a tax consultation to discuss your queries, please contact us at:

  • 604-538-8735 (Greater Vancouver Area, BC)
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.

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With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
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With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
12752 28th Ave, Surrey, BC, V4A 2P4
104–4220 98 St NW Edmonton AB, T6E 6A1

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