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retirement on a pre-tax basis, the ability to watch those savings grow without paying taxes until they are actually withdrawn, there is another savings incentive with which many are not as familiar.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

"Common' Sense

At a time when the nation’s legislative wheels seem mired in partisanship, the last week of January turned out to be a busy one for retirement plan proposals.

First the president unveiled his myRA concept in the State of the Union (along with a reference to an automatic IRA proposal previously included in the White House’s annual budget), followed a day later by introduction of the Retirement Security Act of 2014, a bipartisan proposal by Sens. Bill Nelson (D-FL) and Susan Collins (R-ME). A day after that, Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, formally introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014, an updated version of his 2012 proposal.

All three were intended to expand and improve the retirement savings of Americans—although, as you might expect, the three take quite different approaches. Consider that the myRA calls for the development of a “new retirement savings security” to encourage savings in a kind of Roth IRA, while Sen. Harkin’s proposal would require employers above a certain size to offer a whole new type of retirement savings plan (and would impose some new threshold enrollment and withdrawal requirements on existing 401(k)s, as well). As for the Nelson/Collins proposal, it seems to be largely focused on lowering or removing certain current regulatory and administrative barriers to smaller employers offering retirement plans.

Despite their varied approaches to the commonly-stated goal of expanding retirement savings, all three do have one other key commonality: All look to leverage the success of the work place and systematic payroll deductions in fostering retirement savings. Of course, that’s a foundation whose worth previous EBRI research has documented:¹ the impact that eligibility for a work place retirement plan can have on retirement readiness,² as well as the additional help that automatic-enrollment designs can provide.

It remains to be seen whether the legislative proposals will go anywhere—and the potential impact of myRA on motivating new savers is also uncertain. Just this week, Senate Majority Leader Harry Reid (D-NV) introduced a proposal on defined benefit pension smoothing—not to provide any kind of help for retirement, but as a way to pay for a three-month extension of unemployment benefits.

But as America Saves Week nears, the activity on Capitol Hill serves as an additional reminder that a good place to start—any time, with or without the incentives of legislative change—is to Choose to Save. ®³

Nevin E. Adams, JD

¹ The January EBRI Notes, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” is available online here.

² See “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here, and “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

³ You can find a wide variety of tools and resources—including the popular and widely recommended Ballpark E$timate—at http://www.choosetosave.org/