With tax season in full swing, it’s once again time to remind plan sponsors and participants about an important retirement savings tax credit — one that’s in addition to the tax advantages defined contribution plans already provide.
It’s something fewer than four in 10 workers know about. Also referred to as the Retirement Savings Contributions Credit by the IIRS, the Saver’s Credit is available to eligible taxpayers saving for retirement, according to the Transamerica Center for Retirement Studies (TCRS).
“Most people face competing financial priorities, and saving for retirement can be challenging,” Catherine Collinson, president of TCRS, said in a statement. “By lowering their federal income tax, the Saver’s Credit may help make it easier for eligible workers to save.”
What is the saver’s credit?
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 worker makes to an employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE account.
The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples filing jointly.
“On top of the tax-advantaged treatment of saving for retirement in a 401k, 403b or IRA, the Saver’s Credit is an additional benefit that may reduce a worker’s federal taxes,” Collinson added. “Many eligible retirement savers could be confusing these two incentives, simply because the idea of a double tax benefit sounds too good to be true.”
Who can claim the saver’s credit?
The credit is available to workers ages 18 years or older who have contributed to 401k, 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 with an AGI of up to $32,000 in 2019 or $32,500 in 2020 are eligible;
- For the head of a household, the AGI limit is $48,000 in 2019 or $48,750 in 2020; and,
- For those who are married and file a joint return, the AGI limit is $64,000 in 2019 or $65,000 in 2020.
Additionally, the 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 this fact sheet.
Tips for claiming the saver’s credit
- If using tax preparation software to prepare your tax return, including those programs offered through the IRS Free File program, use Form 1040, Form 1040-SR, or Form 1040-NR. If the software has an interview process, be sure to answer questions about the Saver’s Credit, also referred to as the Retirement Savings Contributions Credit, or Credit for Qualified Retirement Savings Contributions.
- If preparing a 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 the designated line on Schedule 3 (used with Forms 1040 and 1040-SR) or Form 1040-NR.
- If a refund is received, consider directly depositing it into an IRA to boost retirement savings further.
Another potentially overlooked opportunity is the IRS Free File program. Workers who are eligible to claim the Saver’s Credit are often also eligible to take advantage of this program that offers federal income tax preparation software for free to tax filers with an AGI of $69,000 or less.
Ten companies make their tax preparation software available through this program at www.irs.gov/FreeFile.
“Please help spread the word about the Saver’s Credit by telling family, friends, and colleagues. It may meaningfully impact an individual’s long-term savings, and even inspire non-savers to start saving for retirement,” said Collinson. Individuals who are eligible but did not save last year can still contribute to an IRA until April 15, 2020, and may be able to claim the Saver’s Credit for the tax year 2019.
TCRS has created fact sheets, infographics, and newsletter articles—in English and Spanish—that are available and encouraged for public use at www.transamericacenter.org/saverscredit.