Many Americans know the benefit of retirement savings, yet few realize there’s a special incentive to set aside money for their golden years: the saver’s credit.
The saver’s credit, formerly known as the retirement savings contributions credit, offers low- and moderate-income filers a write-off at tax time.
Currently, savers may claim up to 50% of retirement contributions for a maximum credit of $1,000 for single filers or $2,000 for married couples filing together.
Savers may qualify for 50% with an adjusted gross income of $19,750 or less ($39,500 for married filing jointly). The percentages drop to 20% and 10% as income rises and phases out entirely over $33,000 ($66,000 for couples).
Someone may be eligible with workplace retirement plan contributions through Dec. 31, 2021, or individual retirement account deposits before the tax filing deadline.
However, the saver’s credit is non-refundable, meaning it may only reduce or eliminate levies owed, making it difficult to claim for those with little to no tax liability, which is common among low-income filers.
“Right now, the system does not give everybody equal incentives to save,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center.
In 2020, 33% of private industry employees didn’t have access to workplace retirement plans, according to the Bureau of Labor Statistics, and those working part-time were less likely to have employer-provided accounts.
This proposal would give [lower earners] an incentive to save and it does it in a very effective way.
Director of economic policy at the Bipartisan Policy Center
While many workers qualify for an IRA, low-income Americans are less likely to have an account, a Tax Policy Center analysis shows.
However, new proposals from House Democrats may expand retirement plan access while also boosting the saver’s credit through the $3.5 trillion budget.
The House Ways and Means Committee on Thursday approved a provision to require companies without employer-provided retirement plans to enroll employees in an IRA automatically.
The measure may also expand the saver’s credit by making it refundable up to $500, meaning someone may benefit even if they have no tax liability. Savers would receive this matching payment as a deposit in their retirement account, which is different from the current law.
“This proposal would give [lower earners] an incentive to save,” said Akabas. “And it does it in a very effective way.”
The matching funds may be readily available after the deposit, according to the proposal, with the goal of long-term retirement savings. However, someone with a Roth IRA may still access contributions tax- and penalty-free, Akabas said.
“That flexibility is very important, particularly for low and moderate-income households that go through a lot of urgent needs,” he said.
The cost of the saver’s credit expansion is estimated at $23 billion from 2022 to 2031, the Joint Committee on Taxation projects, with matching payments beginning in 2026.