Retirement planning

A guide to the retirement savings incentive, the saver’s tax credit

At a time when roughly half of all American families with adults aged 55 and older have no retirement savings, the saver’s credit is a government incentive intended to encourage people to save money for their retirement. The tax incentive, known as the retirement savings contribution credit by the IRS, is intended for people with low to moderate incomes.

The terms “saver’s tax credit” and “retirement savings contribution credit” are interchangeable and have the same meaning.

Many people are unaware of the benefit, which offers a tax credit to those who make contributions to their eligible retirement accounts and make less than a specific threshold of income. In fact, a 2020 survey from the Transamerica Center for Retirement Studies found that 38% of American workers are unaware of the existence of the benefit.

The saver’s credit information is provided below.

The Saver’s Tax Credit: What Is It?

If you qualify, you can claim the saver’s tax credit as a non-refundable tax credit on your tax return. You may be qualified to claim the credit for up to 50% of the eligible retirement contributions you make to your IRAs or employer-sponsored retirement plans, or $2,000 each year for a single person, depending on your income level.

J. Mark Iwry, a senior fellow in economic studies at the Brookings Institution who is not a resident but gave written testimony in 2003, summed up the benefit thus: “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.”

Iwry added this in his written testimony to the U.S. House Education Subcommittee on Health, Employment, Labor, and Pensions. The non-refundable tax credit functions as a “government matching contribution for individuals.” He advocated for the expansion of the retirement savings credit in his remarks.

The non-refundable income tax credit has been there for well over ten years, although few people are aware of its existence.

According to Debbie Todd, CPA and CEO of iCompass Compliance Solutions, “The saver’s credit is an often-overlooked tax credit that can drastically lower your tax burden while you prepare for retirement.”

Taxpayers who qualify may claim both the credit and the tax deduction for their contributions to tax-advantaged retirement plans like 401(k)s (k).

Although there are many benefits to the program, it’s vital to remember that the saver’s credit is a non-refundable tax credit.

This implies that while the credit can make your tax liability zero, it cannot give you a tax refund, according to Winnie Sun, managing director of Sun Group Wealth Partners.

Who is eligible for the contribution credit for retirement savings?

You must meet three requirements outlined by the IRS in order to file for the retirement savings contribution credit:

  • You must be at least 18 years old, cannot be a full-time student, and cannot be listed as someone else’s dependent on their tax return.

Taxpayers who have made contributions to a qualified retirement account and those whose adjusted gross income exceeds statutory ceilings are two key factors that could disqualify someone.

Which retirement payments are deductible for tax purposes?

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 are eligible for the saver’s credit. The designated beneficiaries of ABLE accounts (tax-advantaged savings accounts for people who develop disabilities before their 26th birthday), those who make after-tax contributions to standard IRAs or Roth IRAs, and others may also be eligible to claim the credit.

When making contributions, use caution because not all qualify for the tax credit. According to Todd of iCompass, taxpayers are not permitted to deduct the sums their employers made on their behalf.

In addition to incurring fines, excess contributions to retirement accounts are not eligible for the saver’s tax credit, according to Sun Group’s Sun.

The rollover of a 401(k) into another retirement plan in the event of a job change would also not qualify for the saver’s credit.

What is the tax credit’s maximum income?

Your credit rate will depend on your amount of income. The amount you can save will help you decide if the tax credit is appropriate for you.

The IRS’s income requirements for the saver’s credit in 2022 are as follows:

Credit rateMarried and filing jointlyFiles as head of householdAll other filers
50%$41,000 or less in adjusted gross income (AGI)$30,750 or less in adjusted gross income (AGI)$20,500 or less in adjusted gross income (AGI)
20%$41,001- 44,000 in AGI$30,751- $33,000 in AGI$20,501- $22,000 in AGI
10%$44,001- $68,000 in AGI$33,001 – $51,000 in AGI$22,001 – $34,000 in AGI
0%$68,000+ in AGI$51,000+ in AGI$34,000+ in AGI

What is the value of the saver’s tax credit?

The saver’s credit is applicable to contributions that qualify. A married couple filing jointly may make up to $4,000 in qualifying contributions, while a single person may contribute up to $2,000 in total. The credit is equal to 50%, 20%, or 10% of your retirement plan contributions, IRA payments, or contributions to an ABLE account. The precise amount is determined by the filers’ adjusted gross income.

Individual taxpayers can obtain up to $1,000 in credit because the maximum is $500. A maximum credit of $2,000 may be available to married couples filing jointly on a combined tax return.

How to determine the saver’s credit’s value

Consider the following illustration to have a better understanding of how the retirement savings contribution credit functions:

For the tax year 2022, Annie, who is unmarried, will have an adjusted gross income of $20,000. She contributes $600 to her regular IRA in addition to $800 to her employer’s 401(k) plan. As a result, Annie qualifies for a $700 non-refundable tax credit. The reason for this is that she qualified donations totaling $1,400 ($800 + $600) and her adjusted gross income qualified her for a 50% credit.

Now let’s think about a married couple:

For the 2022 tax year, Jason and Bridgette are married and filing jointly. Bridgette puts $1,000 into her 403(b) plan and Jason puts $2,000 into his IRA. Their gross income after adjustments is $36,000. They could apply for a $1,500 Saver’s Credit ($2,000 + $1,000 = $3,000, of which $1,500 represents 50% of the total).

Now, if Jason and Bridgette made the same contributions and their adjusted gross income was $50,000, their Saver’s Credit would be $300 ($2,000 + $1,000 = $3,000, of which 10% is $300).

To sum up

The saver’s credit is an important government incentive that encourages those with lower incomes to increase their retirement investments.

Speak with a tax expert for personalized guidance if you have concerns about your particular tax status and whether you are eligible for the saver’s credit.

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