Don’t Forget About the Saver’s Credit

The Saver’s Credit is available to eligible taxpayers who are saving for retirement through a qualified retirement plan at work or in an IRA, yet it seems that every year millions of Americans are missing out on it.

In fact, only 43% of U.S. workers say they are aware of the tax credit that may help them save for retirement, according to survey findings by the Transamerica Center for Retirement Studies. And part-time workers (32%) are even less likely to be aware of the tax credit.   

What Is the Saver’s Credit?

The Saver’s Credit is a non-refundable tax credit that can be applied up to the first $2,000 of voluntary contributions an eligible worker makes to a 401(k), 403(b) or similar employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE account. The maximum credit is $1,000 for single filers or individuals, and $2,000 for married couples filing jointly.

“On top of the tax-advantaged treatment of saving for retirement in a 401(k), 403(b) or IRA, the Saver’s Credit is an additional benefit that may reduce a worker’s federal taxes,” explains Catherine Collinson, CEO and president of TCRS. “Many eligible retirement savers could be confusing these two incentives, simply because the idea of a double tax benefit sounds too good to be true.” 

The credit is available to workers ages 18 years or older who have contributed to a 401(k), 403(b) or similar employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE account in the past year and meet the Adjusted Gross Income (AGI) requirements:

• Single tax filers: maximum AGI of $32,500 in 2020 or $33,000 in 2021
• Heads of households: maximum AGI of $48,750 in 2020 or $49,500 in 2021
• Married filing jointly: a maximum AGI of $65,000 in 2020 or $66,000 in 2021

The amount of the credit is 50%, 20% or 10% of the filer’s contribution to an eligible account, determined by the filer’s adjusted gross income reported on their Form 1040. An IRS factsheet offers an example of how to claim the credit. 

Additionally, the filer cannot be a full-time student and cannot be claimed as a dependent on another person’s tax return. 

Tips for Claiming  

You only get credit if you file for it. If you are using tax preparation software to prepare your tax return, including those programs offered through the IRS Free File program, use Form 1040, Form 1040-SR, or Form 1040-NR. 

• If your software has an interview process, be sure to answer questions about the Saver’s Credit, also referred to as the Retirement Savings Contributions Credit, or Credit for Qualified Retirement Savings Contributions. 
• If you are preparing your tax return manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your exact credit rate and amount. Then transfer the amount to the designated line on Schedule 3 (Forms 1040).  
• If you are using a professional tax preparer, be sure to ask about the Saver’s Credit. 

Make sure the participants you work with get “credit” for saving and your plan sponsor clients are aware of it. Additionally, individuals who are eligible but did not save last year can still contribute to an IRA until April 15, 2021, and may be able to claim the Saver’s Credit for 2020.