As we enter the heart of tax-filing season, here’s something plan advisors should certainly be making sure retirement plan participants are aware of, because apparently most people are not.
More than half of workers (53%) are unaware of the IRS Saver’s Credit, and those with a household income of less than $50,000—who are more likely to be eligible for the credit—are even less likely to be aware of it (39%).
That’s a key finding from a new Transamerica Center for Retirement Studies survey released today.
The Saver’s Credit, also referred to as the Retirement Savings Contributions Credit by the Internal Revenue Service, is available to millions of taxpayers who are saving for retirement. TCRS is trying to raise awareness and get more people to take advantage of it.
“In addition to the other tax-advantages of saving for retirement in a 401(k), 403(b) or IRA, the Saver’s Credit is a benefit that may reduce a person’s federal tax bill. Many retirement savers could be confusing these tax incentives simply because the idea of multiple benefits sounds too good to be true,” said Catherine Collinson, CEO and president of Transamerica Institute and TCRS.
The Saver’s Credit is a non-refundable tax credit that may be applied up to the first $2,000 of voluntary contributions an eligible taxpayer makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE (Achieving a Better Life Experience) account.
In this context, “non-refundable” means the credit cannot exceed a person’s federal income tax for the year. The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples filing jointly. According to TCRS’ analysis of the most recently published IRS data, the average amount of the Saver’s Credit in 2021 was $191.
The credit is available to individuals ages 18 years or older who have contributed to a 401(k), 403(b) or similar employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE account in the past year and meet the Adjusted Gross Income (AGI) requirements:
- Single tax filers: maximum AGI of $36,500 in 2023 and $38,250 in 2024;
- Heads of households: maximum AGI of $54,750 in 2023 and $57,375 in 2024; and,
- Married filing jointly: a maximum AGI of $73,000 in 2023 and $76,500 in 2024.
Additionally, the tax filer cannot be a full-time student and cannot be claimed as a dependent on another person’s tax return. For more details about eligibility, refer to TCRS’ fact sheet.
Saver’s Credit claiming tips
TCRS also listed the following tips advisors can share with participants to help them claim the Saver’s Credit:
- Consider using the IRS’ online tool to help determine eligibility for the credit.
- Those who use an online tax preparation tool to prepare their tax return, including those offered through the IRS Free File program, should be sure to answer questions about the “Retirement Savings Contributions Credit,” and “Credit for Qualified Retirement Savings Contributions.” Also be sure to comparison shop among vendors included in the IRS Free File program and commercially available tax preparation software. Many charge a fee for claiming the Saver’s Credit.
- For those who prepare their tax return manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine the exact credit rate and amount. Then transfer the amount to line 4 on Schedule 3, used with Forms 1040, 1040-SR, and 1040-NR.
- For those using a professional tax preparer, be sure to ask about the Saver’s Credit.
To learn more about the Saver’s Credit, additional information and resources, including fact sheets in English and Spanish, infographics, and a podcast episode are posted and encouraged for public use at www.transamericainstitute.org/saverscredit. More information can also be found at www.irs.gov.
Saver’s Match coming in 2027
TCRS also points out that due a SECURE 2.0 provision, beginning in 2027, the Saver’s Credit will be replaced with the Saver’s Match, a matching contribution from the federal government for retirement savers meeting income and other eligibility requirements. The Saver’s Match will be 50% of a worker’s retirement plan or IRA contributions up to $2,000, representing a maximum match of $1,000.
SEE ALSO:
• Solo 401(k) Plans Eligible for Up to $1,500 in Tax Credits
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.