7 Things You May Not Know About the Saver’s Credit (and 4 You Should)

Beyond the tax advantages to saving for retirement on a pre-tax basis, the ability to watch those savings grow without paying taxes until they are actually withdrawn, there is another savings incentive with which many are not as familiar.

It’s the so-called Saver’s Credit, and it’s available to low- to moderate-income workers who are saving for retirement. For those who qualify, in addition to the customary benefits of workplace retirement savings, it could mean a $1,000 break on your taxes — twice that if you are married and file a joint return!

That said, just 24% of American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey. However, that’s twice as many as found by the 11th Annual Transamerica Retirement Survey.

Here are some things you may not know about the Saver’s Credit:

The official name for the Saver’s Credit is actually the Retirement Savings Contributions Credit.

A wide variety of retirement savings contributions qualify.

The Saver’s Credit can be taken for contributions to a traditional or Roth IRA (including MyRA), a 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, as well as voluntary after-tax employee contributions to qualified retirement and 403(b) plans.

There are two deadlines for contributions.

To qualify for the Saver’s Credit, contributions must be made to 401(k)s, 403(b)s, 457s or the federal government’s Thrift Savings Plan by the end of the calendar year. However, retirement savers have until April 15, 2016, to make an IRA contribution that could qualify them for the Saver’s Credit for tax year 2015.

The Saver’s Credit is (still) not available via the 1040 EZ form (though there have been legislative attempts to remedy that situation.

Rollover contributions aren’t eligible for the Saver’s Credit.

Eligible contributions may be reduced by any recent distributions (for 2015, distributions received after 2012, and before the due date of the 2015 return, including extensions) from a retirement plan or IRA (a list of these distributions is available here.)

The adjusted gross income limits for eligibility are higher for 2016.

While most contribution and benefits limits were not adjusted for 2016, the income limits for the Savers Credit were adjusted higher (a table outlining those changes, as well as the limits for 2015 is available here).

And some things you may know (but are worth repeating)…

The amount of the credit is 50%, 20% or 10% of retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (reported on your Form 1040 or 1040A).

It is a credit — a dollar-for-dollar reduction of tax liability. If 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 Saver’s Credit.

In order to claim the credit, individuals must be 18 years or older, must not be a full-time student, and cannot be claimed as a dependent on another person’s return.

You only get the credit if you file for it. It’s not too late to save and get “credit” for doing so — make sure the participants you work with, and plan sponsors you work for — are aware.

Additional information about the Savers Credit is available here:
https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit
https://www.irs.gov/uac/Newsroom/Plan-Now-to-Get-Full-Benefit-of-Saver%E2%80%99s-Credit
https://www.irs.gov/uac/Save-Twice-with-the-Savers-Credit

5 Reasons Why Your Small Business Should Offer a Retirement Plan

People who don’t have access to a plan at work don’t save for retirement. Here’s why small business owners should care.

About half of private sector workers did not participate in a workplace retirement savings program in 2012, and a recent report by the Government Accountability Office (GAO) found that most workers who did not have coverage lacked access to such programs.

While there are many reasons that might account for those individual decisions, among those not participating, the majority worked for an employer that did not offer a program or they were not eligible for the programs that were offered. In particular, lower income workers and those employed by smaller firms were much less likely to have access to programs, after controlling for other factors. However, the majority of these workers participated when they had workplace access.

Here’s why small businesses should provide that access.

To attract and retain workers.

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. But it’s a bit more complicated than that. The reality is that a larger employer that does not offer a retirement plan benefit sticks out like a sore thumb.

However, among smaller employers, the situation is almost a mirror image. In fact, the GAO reports that only 14% of small employers with fewer than 100 employees sponsor a plan in which workers can save for retirement.

The opportunity for smaller employers then, is to stand out from your competition precisely because you do offer a workplace retirement plan.¹ And to use plan design features such as vesting and an employer match to keep the good workers you’ve attracted, and maintain that competitive edge.

Your workers will use it.

This may seem obvious, but among the more intriguing rationales offered by small businesses for not offering a workplace retirement plan was one put forth in a 2003 Small Employer Retirement Survey by the Employee Benefit Research Institute (EBRI) — that their employees are “not interested” in having a retirement plan. And I have actually had plan sponsors say to me “nobody has ever asked about a 401(k).” Well, I’ll grant you that workers are probably more concerned about their paycheck, and perhaps health care. And they may just be glad to have a paying job, and don’t want to rock the boat by pressing for benefits.

That said, the vast majority of workers who do not participate in a workplace retirement plan – 84% — reported they did not have access to a workplace retirement program. Of two key access factors — the employer must offer a program, and the worker must be eligible to participate — GAO found that the lack of access was primarily due to employers not offering a retirement program (68% reported they worked for an employer that did not offer a program, and another 16% reported they were not eligible for the program their employer offered. Indeed, the GAO report found that workers at the largest firms were only slightly more likely to participate compared to workers at the smallest firms.

Your workers need it.

You may well employ a workforce that has alternative sources of retirement income — a legacy from that rich uncle everyone’s so fond of, or maybe they have a surefire lottery strategy. Or perhaps their pension or savings from a prior employer, combined with Social Security, will be “enough.”

But EBRI’s 2014 Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course — but it’s a big part of it.

You need it (too).

It’s not unusual for a small business owner to invest heavily in the enterprise, including sinking some of their own personal retirement savings into “the business.” Whether you have or not, and no matter how much you are now able to pursue your passion, you’ll want to provide for a retirement at some point that doesn’t necessarily require liquidating your business to fund it. That’s when the benefits that your employees appreciate can pay off for you as well, including:

• The availability of pre-tax contributions that can reduce your current taxable income.
• Deferral of taxes on pre-tax contributions and investment gains until you take a distribution.
• The flexibility of a Roth 401(k) (if offered).
• The “magic” of compounding returns over time.

Oh, and there are tax advantages. 

Despite all the compelling reasons outlined above, for some it still (rightly) comes down to the bottom line. And, in addition to the benefits of offering a plan, there are some tax advantages designed to encourage you to do so.

Any employer matching contributions will be tax-deductible, as will any costs incurred by the employer in connection with offering the plan. Better yet, you may be able to claim a tax credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan.
But don’t take my word for it — here’s what the IRS has to say.

Let’s face it, there are any number of reasons to put offering a workplace retirement plan — not enough time, worries about the expense, a sense that this is something better put off to a future time.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

Nevin E. Adams, JD

1. A growing awareness of the coverage “gap” among smaller employers has led a number of states to consider a variety of initiatives that, generally speaking, include a requirement that employers above a certain size/business longevity threshold offer a payroll deduction IRA option to their employees. The Obama administration is lending its support to these efforts, with some additional regulatory clarity anticipated before the end of the year.