Saver’s tax credit: everything you need to know about the retirement savings benefit

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The saver’s credit is a government incentive designed to encourage consumers to put away funds for their retirement at a time when almost half of all American households age 55 and older have saved nothing for retirement. The tax break, which the IRS refers to as the retirement savings contribution credit, is geared to low- to moderate-income citizens.

While it provides a tax credit to those who contribute to their qualified retirement accounts and earn under a certain amount, many taxpayers aren’t familiar with the benefit. In fact, 38 percent of U.S. workers have no clue the benefit exists, according to a recent survey from Transamerica Center for Retirement Studies.

If there is a silver lining, it’s that taxpayers have an additional three months to learn about the saver’s tax credit and take advantage of it in 2020. The tax filing deadline for the 2019 tax year has been pushed back to July 15 due to the COVID-19 crisis.

Here’s everything you need to know about the saver’s credit.

What is the saver’s tax credit?

The saver’s tax credit is a non-refundable tax credit you can claim on your tax return if you are eligible. Depending on your income level, you may be able to claim the credit for up to 50 percent of eligible retirement contributions that you make toward your IRAs or employer-sponsored retirement plans — up to $2,000 per year for a single person.

In written testimony in 2003, J. Mark Iwry, a nonresident senior fellow in economic studies at the Brookings Institution, summed up the benefit this way: “The saver’s credit is one of the most significant targeted initiatives ever enacted to promote tax-qualified retirement savings for moderate- and lower-income workers.”

The non-refundable tax credit acts as a “government matching contribution for individuals,” Iwry added as part of his written testimony to the U.S. House Education Subcommittee on Health, Employment, Labor, and Pensions. His comments were made in support of expanding the retirement savings credit.

Though the non-refundable income tax credit has been available for well over a decade, it’s still not a well-known benefit.

“The saver’s credit is an often-overlooked tax credit that can significantly reduce your tax bill while you save for retirement,” says Debbie Todd, CPA, and CEO of iCompass Compliance Solutions.

Eligible taxpayers can claim the credit in addition to the tax deduction for contributing to a tax-advantaged retirement plan, like a 401(k).

While the program has many advantages, it’s also important to note that the saver’s credit is a non-refundable tax credit.

“That means this credit can reduce the tax you owe to zero, but it can’t provide you with a tax refund,” says Winnie Sun, managing director of Sun Group Wealth Partners.

Who is eligible for the saver’s tax credit?

To file for the retirement savings contribution credit, you need to satisfy three requirements set forth by the IRS:

  • You need to be at least 18 years old;
  • You cannot be enrolled as a full-time student; and
  • You cannot be claimed as a dependent on someone else’s tax return.

Who is not eligible?

There are a couple of major issues that could render someone ineligible:

  • Taxpayers filing for the credit must have made contributions to qualifying retirement accounts. So, if you haven’t made contributions, you can’t take advantage of the credit.
  • A taxpayer’s adjusted gross income cannot exceed the caps set by the government.

What kinds of retirement contributions are eligible for the tax credit?

The saver’s credit is available to eligible taxpayers who make pre-tax contributions to employer-sponsored 403(b), 401(k), 501(c)(18), SIMPLE IRA, SARSEP or governmental 457(b) plans. Also, those who contribute after taxes to traditional IRAs or Roth IRAs and designated beneficiaries of ABLE accounts (tax-advantaged savings accounts for people who develop disabilities before their 26th birthday) may be able to claim the credit.

What kinds of retirement contributions are not eligible for the tax credit?

Taxpayers cannot claim the amounts their employers contributed on their behalf, iCompass’ Todd says.

Also, any money contributed to a retirement account above the allowable limit, in addition to being subjected to penalties, is ineligible for the saver’s tax credit, says Sun Group’s Sun.

If someone were to change jobs and roll over a 401(k) into another retirement plan, the rollover wouldn’t be eligible for the saver’s credit either.

What is the saver’s tax credit worth?

The saver’s credit applies to qualifying contributions. A single person can make up to a $2,000 contribution and a married couple filing jointly can make up to $4,000 in eligible contributions. The amount of the credit is 50 percent, 20 percent or 10 percent of your retirement plan or your contributions to an IRA or ABLE account. The exact amount depends on the adjusted gross income of those filing.

Because the maximum credit is 50 percent, the most individual taxpayers can receive is $1,000. Married couples filing jointly may be able to get a maximum credit of up to $2,000 on a joint tax return.

Here’s a look at the IRS’ income guidelines for 2020 saver’s credit:

Credit rate Married and filing jointly Files as head of household All other filers
50% $39,000 or less in adjusted gross income (AGI) $29,250 or less in adjusted gross income (AGI) $19,500 or less in adjusted gross income (AGI)
20% $39,001-$42,500 in AGI $29,250-$31,875 in AGI $19,501-$21,250 in AGI
10% $42,501-$65,000 in AGI $31,876-$48,750 in AGI $21,251-$32,500 in AGI
0% $65,000+ in AGI $48, 751+ in AGI $32,500+ in AGI

Calculating the value of the saver’s credit

To better understand how the retirement savings contribution credit works, Sun offered this example:

Annie, whose tax-filing status is single, has an adjusted gross income of $19,200 for tax year 2019. She contributes $800 to her employer-sponsored 401(k) plan, plus $600 to her traditional IRA. Annie is therefore eligible for a non-refundable tax credit of $700. This is because she had $1,400 in qualifying contributions ($800 + $600), and her adjusted gross income allowed for a 50 percent credit.

Todd shared this example of a married couple:

Jason and Bridgette are married filing jointly for the 2019 tax year. Jason contributes $2,000 to his IRA, and Bridgette contributes $1,000 to her 403(b) plan. Their adjusted gross income is $36,000. They would be eligible to claim a $1,500 Saver’s Credit ($2,000 + 1000 = $3,000, of which 50 percent is $1,500).

Now, if Jason and Bridgette’s adjusted gross income equaled $46,000 and they made the same contributions, their Saver’s Credit would be $300 ($2,000 + $1,000 = $3,000, of which 10 percent is $300).

Bottom line

The saver’s credit is a valuable government incentive to help motivate people with more modest incomes to invest more money for retirement.

If you have questions about your specific tax situation and whether you qualify for the saver’s credit, speak with a tax professional for individual advice.

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