It has been 20 years since Congress created the Saver’s Credit to help low- and moderate-income workers who contribute to a retirement plan. Since then, there have been ongoing efforts to expand the Saver’s Credit. Even so, the Saver’s Credit remains a poorly understood benefit for retirement savers.
In this entry in the American Savings Education Council blog series, Nevin Adams, Chief Content Officer at the American Retirement Association, examines how the Saver’s Credit works and what to do to “get” it.
The U.S. government has long offered an encouragement for individuals to save for retirement — unfortunately, most aren’t aware of it. In fact, only 43 percent of U.S. workers say they are aware of the tax credit that may help them save for retirement, according to survey findings by the Transamerica Center for Retirement Studies — and part-time workers (32 percent) are even less likely to be aware of the tax credit.
Believe it or not, in addition to the customary benefits of workplace retirement savings, the amount of the aptly named “Saver’s Credit” is 50 percent, 20 percent, or 10 percent of retirement plan contributions you make (depending on your adjusted gross income).
1. How Much Is the Saver’s Credit?
The saver’s credit is worth up to $1,000 ($2,000 if married filing jointly).
2. Rollovers Don’t Count
To qualify, the contribution must be new contributions — rollovers from your 401(k) into a new individual retirement account (IRA) don’t count.
3. Distributions Count (in a “bad” way)
Eligible contributions may be reduced by any recent distributions from a retirement plan or IRA.
4. Lots of Savings Accounts “Count”
The value of the Saver’s Credit is calculated based on your contributions to a traditional or Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b) or 457(b) plan, and even ABLE accounts (tax-advantaged savings accounts for people with disabilities and their families).
5. Not Everyone Is Eligible
In addition to certain income limits (basically, under $66,000/year – see table here), to be eligible for the Saver’s Credit, individuals must be ages 18 or older, can’t be full-time students, and can’t be claimed as a dependent on another person’s return.
6. There Are Multiple Deadlines to Make Those Contributions
To qualify for the Saver’s Credit, contributions must be made to 401(k) plans, 403(b) plans, 457 plans, or the federal government’s Thrift Savings Plan by the end of the calendar year. However, retirement savers have until April 15 to make an IRA contribution that could qualify them for the Saver’s Credit for the prior tax year.
7. It’s a Credit, Not a Deduction
While the money you save in a 401(k) or IRA is tax deferred, the Saver’s Credit is even better — it actually reduces your actual tax bill dollar for dollar.
8. But Only If You Pay Federal Income Tax
As noted above, it’s a tax credit, not a deduction — a dollar-for-dollar reduction of tax liability. However, if you don’t owe federal income taxes (say, because the standard or itemized deductions or personal exemptions eliminate tax liability), you can’t claim the Saver’s Credit. Moreover, it can’t be carried forward to the next year. Nor can you get a tax refund based only on the amount of the credit. But, if you DO owe federal income taxes, it’s a pretty sweet way to eliminate or reduce those!
9. And You (Still) Have to File Your Taxes on the 1040 “Long Form”
And you also have to complete Form 8880, the aptly named “Credit for Qualified Retirement Savings Contributions,” to get the credit. That’s right, the Saver’s Credit is (still) not available via the 1040-EZ form (though there have been legislative attempts to remedy that situation — including one currently in Congress).
10. To “Get” the Saver’s Credit…
But the most important thing to know about the Saver’s Credit is that you only get it if you file (ask) for it!
Additional information about the Saver’s Credit from the IRS is available here.