Contributors to retirement plans already know the long-term tax advantages of an IRA or 401(k). Taxes are deferred, and in some cases never collected, on money put away for the golden years.

In this tax tip: • Income limits   • Which contributions count?   • Some restrictions apply

Now a tax credit will let some savers reap the rewards of their retirement thrift early.

The retirement savings tax credit, also called the saver's credit, appears on both the 1040 and 1040A tax returns as a way to reward lower-wage earners who sock away retirement money.

Since the tax break is a credit instead of a deduction, it's a better deal. Tax deductions reduce taxable income, but credits come into play after you calculate how much tax you owe and reduce your Internal Revenue Service bill dollar for dollar. For example, if you owe $500 and you are eligible for a $250 credit, the check you have to write to Uncle Sam is cut in half.

Income limits
A filer eligible for the saver's credit could shave as much as $1,000 off his tax bill. The actual credit amount depends on your income, filing status and just how much you put into retirement plans.

Basically, the lower your income, the bigger your credit. The income limits that determine how large a credit you can claim are adjusted annually to keep pace with inflation. The precise credit percentages for 2008 filings are:

Retirement savings credit guidelines

As the table shows, the maximum available credit is 50 percent of contributions for filers in the lower end of the earnings ranges. There is, however, a limit on the retirement plan contribution amount you can use to figure the tax break.

Although tax law allowed you to put up to $5,000 in 2008 ($6,000 if you're age 50 or older) in your IRA, only $2,000 of that will count in figuring the saver's credit. That makes it worth at most $1,000 for single taxpayers. Of course, if you're married and both you and your spouse put away at least two grand toward retirement, your joint return would reflect a $2,000 credit.

Which contributions count?
Contributions to traditional and Roth IRAs as well as to employer-sponsored 401(k) plans count toward computing the credit. So does money you put into a Savings Incentive Match Plan for Employees, or SIMPLE, plan; a 403(b) program; a governmental 457 plan; or a salary reduction Simplified Employee Pension, or SEP. You can only count the money you put in your workplace account, not any matching amounts your company contributed.

The credit is based on your total contributions to all your eligible retirement accounts, not for contributions to each. So if you put $2,000 into a Roth and another $2,000 into your 401(k) at work, you still can only calculate your credit on the allowable maximum of $2,000.

Enter all your retirement saving amounts on Form 8880, Credit for Qualified Retirement Savings Contributions and complete the form to arrive at your exact credit rate and amount. Once you get the dollar amount, transfer it to line 51 of your 1040 or line 32 if you file the 1040A. The credit isn't available for 1040EZ filers, so you might want to consider changing your choice of returns if you've been putting away retirement cash.