Time to Get to Know the Saver’s Credit
The Saver’s Credit (aka the Retirement Savings Contributions Credit) helps lower to middle income taxpayers to reduce their taxes when they contribute to an employer retirement plan or a traditional or Roth individual retirement account. The vehicle is a nonrefundable tax credit, the amount being based on adjusted gross income. (A nonrefundable tax credit is limited in that “once a taxpayer’s liability is zero, the taxpayer won’t get any leftover amount back as a refund,” according to the IRS.) The Saver’s Credit was enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001.
Since all credits have limits, let’s start there. First, there is a limit on the contribution amount that can be used to claim the credit. The maximum contribution to an IRA or 401(k) or other retirement plan that can qualify for the credit is $2,000 for an individual and $4,000 for those who are married and filing jointly.
Second, there is a limit on the amount you can receive as a credit, with 50% being the maximum. If you can qualify for the maximum credit of 50%, an individual contributing $2,000 to an IRA, for example, could receive a tax credit of $1,000; the maximum a married filing jointly taxpayer could receive is $2,000.
Ranges for the Saver’s Credit
The credit, according to IRS Tax Topic No. 610, Retirement savings contributions credit, “can be as low as 10% or as high as 50% and is generally based on the contributions you make and your adjusted gross income. The lower your income (or joint income, if applicable), the higher the credit rate.”
As an example, for the 2023 tax year the AGI limits are as follows:
- To receive a 50% contribution tax credit for married filing jointly, your adjusted gross income cannot be higher than $43,500 ($21,750 for a single person).
- If your AGI is between $43,501 and $47,500 for married filing jointly ($21,751-$23,750 for a single person), the credit is 20% of your contribution.
- If your AGI is between $47,501 and $73,000 for married filing jointly ($23,751-$36,500 for a single person), the credit is 10% of your contribution.
Above AGI of $73,000 for married filing jointly ($36,500 for a single person), there is no credit.
Check Saver’s Credit Resource
It’s worth it to see if you qualify. The IRS makes it easy for you to check your eligibility with the Interactive Tax Assistant, which you can find on the IRS website. To use the tool, which asks a series of questions, you will need to know your filing status, your adjusted gross income, information about any distributions from retirement plans, and whether you can be claimed as a dependent on another person’s tax return. The tool will tell you if you are eligible for the credit. All you need to do then is claim it on your tax return. Use Form 8880, “Credit for Qualified Retirement Savings Contributions,” to file for the credit.
As with any tax situation, be sure to also consult your tax adviser.
What If I’ve Already Filed My Return?
If you have already filed your tax return for 2023 and did not file for the Saver’s Credit but wish you had, consider filing an amended return (Form 1040-X) along with Form 8880, advised an IRS spokesperson.
If you have a refund coming, though, it’s “best to wait” until you receive the refund before filing an amended return, according to the IRS spokesperson, who added, “It’s also possible that in processing, we may spot the omission and make an adjustment.”
Better Than A Credit? The Saver’s Match
Thanks to SECURE Act 2.0, the Saver’s Credit will become the Saver’s Match beginning with the 2027 tax year.
When the new Saver’s Match takes effect, there is a federal matching contribution, which must be put in a taxpayer’s IRA or retirement plan account (but not a Roth account). The match is 50% of retirement plan or IRA contributions, up to $2,000 per individual. The amount will not count toward your annual contribution limit.
The match phases out between $41,000 and $71,000 (modified adjusted gross income, or MAGI) for taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers), but there are not three brackets like the current Saver’s Credit. Also, the ranges are indexed for inflation.
Note that if the matching contribution is less than $100, it will become a nonrefundable tax credit (like it is currently) instead of a matching contribution.
Much like the current Saver’s Credit, the Saver’s Match is not available for people under age 18, those who are claimed as a dependent on someone else’s tax return or are full-time students.
A Big Deal: Match for 22 Million People?
An estimated 21.9 million people could qualify for the Saver’s Match beginning in 2027, according to a recent research report published by the non-profit Employee Benefit Research Institute.
“A government match for low and middle earners is a wonderful development in general,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, wrote in a MarketWatch blog last year. She did, however, note some concerns about how it will work, including “How is the government going to know where to send the match and how will it move the funds mechanically?”
A Need-to-Know Resource
Studies tell us that not enough people are taking advantage of tools and techniques to save for retirement. This is an area where what you don’t know can hurt you. It doesn’t take much time to learn the basics, but it takes some energy – not much, just enough — to gather the resources that are available to you.
The Saver’s Credit is a good example of a need-to-know resource. A Transamerica Retirement Survey report released in December 2023 found that only 40% of the general population is aware of the Saver’s Credit.
Questions
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