Saturday, December 01, 2018

6 Things Those Who Don’t Get the Saver’s Credit Don’t ‘Get’ About the Saver’s Credit

Last week, Senate Democrats unveiled a bill that would, among other things, enhance the Saver’s Credit – a provision which retains bipartisan support, even as the take-up rate disappoints. Here are six things that people who don’t get the Saver’s Credit often don’t “get.”

The Saver’s Credit is, of course, a tax credit from the federal government for low- to moderate-income workers who are saving for retirement. For those who qualify,1 in addition to the customary benefits of workplace retirement savings, the amount of the credit is 50%, 20% or 10% of retirement plan (or IRA or ABLE account) contributions depending on adjusted gross income.

Credit ‘Limits’?

And yet, some of the things that seem to be holding back the take-up rates could surely be addressed with a legislative “fix” – and here we’re talking about the relatively low income thresholds to which it applies, the fact that while it’s a credit, it’s not a refundable credit (and thus you have to have a federal income tax against which it can be offset), and that you have to file on Form 1040, rather than on Form 1040-EZ (which many, perhaps most, lower income individuals use).

That said, the Transamerica Center for Retirement Studies’ 18th Annual Retirement Survey found that two out of three American workers are unaware of the Saver’s Credit. And so, as we near the end of the tax year, and look to possible withholding changes for 2019, here are some things people who might be eligible for the Saver’s Credit don’t always “get” about it.

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, 2019, to make an IRA contribution that could qualify them for the Saver’s Credit for tax year 2018.

A wide variety of retirement savings contributions qualify.

The Saver’s Credit can be taken for contributions to a traditional or Roth IRA, 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. However, rollover contributions aren’t eligible for the Saver’s Credit – and eligible contributions may be reduced by any recent distributions from a retirement plan or IRA.

The income limits are higher for 2019.

The income limits for those eligible for the Saver’s Credit were adjusted higher for 2019 – to $64,000 (from $63,000 in 2018) for a married individual (a table outlining those changes, as well as the limits for 2018 and 2019 is available here).

You have to have a federal income tax bill to get the tax credit.

It’s a tax credit, not a deduction – a dollar-for-dollar reduction of tax liability. However, 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 credit.

You have to file your taxes on Form 1040.

And complete Form 8880, the aptly named “Credit for Qualified Retirement Savings Contributions” to get the credit. That’s right, the Saver’s Credit is (still) not available via the 1040-EZ form (though there have been legislative attempts to remedy that situation – including the bill introduced last week.

You only get 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 of it.

Additional information about the Saver’s Credit from the IRS is available here.

- Nevin E. Adams, JD
  1. In addition to the income limits, to be eligible for the Saver’s Credit, individuals must be age 18 or older; not a full-time student; and not claimed as a dependent on another person’s return.

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