Using the Saver's Credit can bolster retirement plan participation

Your client has a retirement savings plan — great! The next step is to encourage participation by providing information about the plan to their employees. As a benefits adviser, you may help motivate the employee populations you serve to jump-start their retirement savings by increasing awareness of the benefits of tax credits, including the Saver's Credit. 

This little-known federal tax credit is generally available to lower-income participants who contribute to employer-sponsored retirement plans and IRAs. According to the Congressional Research Service, the share of taxpayers claiming the Saver's Credit has gradually trended up to 6.1% in 2019 from 4.1% in 2002. 

It's important for employees to understand the difference between a tax deduction and tax credit. A tax credit, including the Saver's Credit, is claimed in addition to any deduction for a contribution that may apply. A tax credit is generally more beneficial because it provides a dollar-for-dollar reduction on the tax that is owed. A tax deduction, on the other hand, reduces the amount of taxable income that is used to calculate an individual's tax liability. 

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If a specific tax credit is considered refundable, individuals may receive a refund even if they don't owe any tax. The Saver's Credit is currently nonrefundable. So if the tax credit is greater than an individual's tax liability, the IRS does not refund the difference. 

To claim the Saver's Credit, employees also should be aware that they must meet certain requirements. Individuals may claim a portion of the annual contributions (including Roth contributions) they make to employer-sponsored retirement plans and IRAs as a nonrefundable tax credit, subject to several requirements. They include the individual being age 18 or older, not being a full-time student or claimed as a dependent on another person's tax return.

If these criteria are satisfied, the amount of the credit then depends on the individual's adjusted gross income and tax-filing status. The tax credit, up to $1,000 for individuals or $2,000 for joint filers, may be 10%, 20% or 50% on contributions up to $2,000, depending on the applicable adjusted gross income limits. 

*Single, married filing separately, or qualifying widow(er)

Individuals can claim the Saver's Credit for contributions made to their traditional or Roth IRA; elective deferrals made to a SIMPLE IRA plan, 401(k) plan, 403(b) plan, or governmental 457(b) plan; and after-tax contributions made to a qualified retirement plan or 403(b) plan. An individual who is the designated beneficiary of an Achieving a Better Life Experience account also can claim the credit for contributions made to that account. Note that individuals cannot claim the credit for rollover contributions.

The Saver's Credit is claimed using IRS Form 8880, Credit for Qualified Retirement Savings Contributions, and is submitted along with the individual's IRS Form 1040, U.S. Individual Income Tax Return (or similar return). 

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Individuals should be careful not to take certain retirement account distributions, since the credit may be reduced by withdrawals made during the testing period. They can be referred to IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for more information.

You might be asking yourself, how can we increase awareness of the Saver's Credit and help a client's employees lower their tax bill? One way is to mention the credit and share within employee communications an online IRS Interactive Tax Assistant resource. You also could discuss the Saver's Credit during informational meetings about the plan.

Looking forward, stay tuned to proposed changes to the Saver's Credit included in the Securing a Strong Retirement Act (legislation. This legislation, commonly known as SECURE 2.0, proposes to improve the Saver's Credit for lower-income individuals by replacing the tiered formula with a single 50% credit on contributions up to $2,000 (effective for taxable years starting after December 31, 2026). 

No matter the route, spreading the word about the Saver's Credit and encouraging your client's employees to take advantage of it will ultimately help them. They will benefit from increased retirement readiness and may get a bit of extra cash in their pocket.