tax-free roth conversions with the saver's credit

The Retirement Savers Contribution Credit, aka the Saver’s Credit, is a nice incentive for households to contribute to qualified retirement accounts (IRAs, 401ks, etc…)

It’s also a nice incentive for early retirees who make a little hobby / side-hustle money to make MASSIVE Roth conversions on Uncle Sam’s dime.

The Saver’s Credit

The Saver’s Credit offers great promise – contribute up to $2,000/person to a qualified retirement account and the IRS will reduce your taxes by up to $1,000. That is an immediate 50% return on investment!

Seems nice to get a 50% tax credit. It’s a virtually impossible thing to achieve, however.

As these things usually go, it’s an income-dependent credit… the more you make, the less you get.

This credit phase-out is shown in the following IRS table from Form 8880 (pdf), and then visually courtesy of my Excel spreadsheet.

Line 8 = Adjusted Gross Income (AGI)

In addition to being income-dependent, the Saver’s credit is also non-refundable.

In other words, In order to get a $1,000 credit, you must first owe $1,000 in federal taxes. Which almost never happens at Saver’s credit compatible income levels …

The following chart shows the saver’s credit in practice – the amount of tax credit we can get is limited to the amount of federal tax we owe. With the exception of a very small window for a Head of Household filer, the maximum Saver’s credit phases out way ahead of the federal tax tables.

Maximum achievable Saver’s Credit (2019)
Single: $705 @ AGI $19,249
Head of Household: $1,000 @ AGI $28,350 – $28,874
Married Filing Jointly: $1,410 @ AGI $38,499

Saver’s Credit in Early Retirement

Being unable to get the full credit seems like a bummer. But there is another way to look at it…

The Saver’s credit effectively eliminates all federal tax burden for incomes up to these thresholds, which is equivalent to increasing the standard deduction (aka the 0% tax bracket.) Instead of zero tax up to $24,400 for a married couple filing jointly, there is zero tax up to $38,499, for example.

Who wouldn’t appreciate a larger standard deduction? And so…

To get the maximum achievable saver’s credit, we must first contribute $2k/person to an IRA. A Roth IRA, ideally.

To make $2k – $4k of IRA contributions, we first need $2k – $4k in earned income. (Only earned income can be contributed.)

And then to get the maximum Saver’s Credit, we would need to increase taxable income by up to $34,499, but no more (2019, MFJ.)

If only there was a simple and easy way for early retirees to do that…. Oh, I know. Roth conversion!

Earn $4k. Convert ~$35k. Pay $0 federal tax. (Single filers, divide by 2.)

Things to Consider

But how will I live? Cash – from a practical perspective, this is probably only manageable in the first 1-3 years of early retirement. That said, it does lay a nice foundation as these large Roth conversions will be accessible tax and penalty-free within 4-5 years.

Can I also withdraw original Roth contributions during this phase? No – any withdrawal from a retirement account, in the current year or previous 2 years, reduces dollar for dollar the amount of IRA contribution eligible for the saver’s credit. Otherwise, you could just make a Roth contribution, get the credit, and then withdraw the contribution. (See IRS Q&A, pdf.)

Doesn’t a Roth conversion also eliminate eligibility for the Saver’s credit? No –  see the text on Form 8880

“Don’t include … Distributions from your eligible retirement plan (other than a Roth IRA) rolled over or converted to your Roth IRA.”

What is a good way to earn $2k-4k/year? – retiring after 1-n paychecks in January is a good way for the 1st year. A part-time job will also work. Or a common side-hustle like blogging, monetize your hobby, whatever suits your fancy. (See: Everyone should blog!)

Will I need to pay State taxes? – If you live in one of the 43 States with an income tax, yes, possibly. My estimate for total tax burden in California with $40k/year income for our family was < $200, which is less than the $1,410 benefit from the Saver’s credit. Conversely, in Colorado, we might pay $1,850 on $40k income, making this strategy a net loss.

What about ACA subsidies, won’t this increase the amount we pay for health insurance premiums? – Indeed it may.

If, like us, you choose to spend a few years outside the US then no worries at all. It’s a good way to kickstart your retirement. Or maybe you choose to self-insure or use one of the ACA alternatives.

But if you do use the ACA, higher income means higher premiums. Sometimes. Most of the time. (For example, a quote we received for an HSA-eligible Bronze plan in California at FPL ~200% was $2/month.)

(A good way to internalize the relationship between income and insurance premiums is to experiment with our ACA premium calculator.)

At a minimum, we need 138% FPL or so in most states to be eligible for ACA subsidies. Above that threshold, the effective “tax” is now the same for ordinary income as for qualified dividends and long-term capital gains, i.e ~15%, rather than the 25-27% without the Saver’s credit. Worth it? It’s an individual choice.

Most of my income is from dividends and long-term capital gains. Can I do this too? – Probably not. This is best for people with the majority of their savings in retirement accounts, and without large unrealized capital gains in a taxable account (so no opportunity cost for not harvesting gains.)

Income from qualified dividends or long-term capital gains reduces the maximum Saver’s credit we can achieve as it increases AGI without increasing federal tax burden (taxed at 0%.) Since the saver’s credit is a nonrefundable credit, we need tax burden to offset.


The Retirement Savers Contribution Credit, aka the Saver’s Credit, is a nice tax incentive. Contribute up to $2,000/person to a qualified retirement account and the IRS will reduce your taxes by up to $1,000.

It’s (virtually) impossible to get the full Saver’s credit, but for many, it can have the effect of increasing the standard deduction by thousands of dollars. Early retirees willing to earn up to $2k/year/person can use this to do massive Roth conversions at a 0% federal tax rate.

Let the IRS pay for your Roth conversion!

Has the Saver’s Credit Paid For Your (Massive) Roth Conversion?