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retirement on a pre-tax basis, the ability to watch those savings grow without paying taxes until they are actually withdrawn, there is another savings incentive with which many are not as familiar.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

Comments

Post a Comment

Popular posts from this blog

Do Roth and 401(k) Pre-Tax Holders Really Spend Differently?

Image
An interesting—and somewhat counterintuitive—report came out last week, one that cast doubt on the “common wisdom” regarding Roth versus traditional pre-tax savings. The assumption underlying the research [i] was that those who had not yet paid taxes on their savings (the traditional pre-tax savings) would be hesitant to tap into those savings and trigger taxes, certainly more so that individuals that had already paid those taxes. Instead, the research suggested that the opposite occurred; that individuals who had saved on a pre-tax basis actually withdrew more/sooner—but with a twist.  This they hailed as good news. They noted that the research suggests investing in a CT (current-taxed, or Roth) plan could help ease concerns about outliving funds—because they spend at a lower rate (though they saw this as a negative for those who saved on a deferred tax (DT) basis).  They even managed to find a silver lining in the “cloud” of faster spending by the pre-tax c...
Read more

Is the 401(k) Really a ‘Horrible’ Retirement Plan?

Image
  A recent “news” post about a blog post finds some curious “faults” with the 401(k). The news item carried the provocative title “ ‘Rich Dad’ Robert Kiyosaki Reveals Why the 401(k) Is a ‘Horrible’ Retirement Plan .” It originally ran on GoBankingRates.com, but was subsequently picked up in syndication on Yahoo Finance (at least). For the uninitiated, Robert Kiyosaki is one of those “I’ll help you get rich the way I did” types, providing that road map via books (notably “Rich Dad, Poor Dad”) and seminars. He offers comparisons to decisions made by his dad (poor dad) in contrast to those of the father of his best friend (rich dad).  Suffice it to say that his dad worked hard and saved the old-fashioned way—which is NOT his advice to you. That’s included previous pearls of wisdom like “ Why Saving Money is the Wrong Way to Prepare for Retirement .” Apparently rather than saving for retirement, we’re supposed to “look for an investment that will pay for your desired standard of l...
Read more

The Biggest 401(k) Rollover Mistake

Image
  Readers of these columns know that for years I held off rolling over my old 401(k) balances. Oh, I had rational reasons for (not) doing so; the institutional pricing of a particular fund in one, the low fees in another, the managed account option in a third—but the reality was that the process of rolling over your accumulated savings has been—and in many cases remains—painful. Rollovers are a big deal. Vanguard reports that annual contributions to IRAs ($701 billion as of 2020) far exceed all DC plan contributions, largely due to rollovers ($618 billion in 2020), while the Investment Company Institute claims that investors now hold an estimated $13.5 trillion in IRAs—“approximately $3 trillion more than in DC plans, despite the fact that 45 million fewer Americans own IRAs than participate in DC plans,” according to the report Two things, in particular, stayed my hand over the years—trying to time the liquidation of funds (I know, but I’m human), and worrying about the timing I’d...
Read more