Get Paid to Save for Retirement
A little-known tax credit is available to encourage moderate-income Americans to save more for their retirement years
Did you know that you may be eligible for a tax credit to encourage you to save money for retirement? According to the nonprofit Transamerica Center for Retirement Studies, millions of people are not aware they may qualify for the Saver's Credit.
The credit, formally called the Retirement Savings Contributions Credit, can be worth as much as 50% of the amount that moderate-income workers set aside each year for retirement.
"The federal government created the Saver's Credit to incentivize Americans to save for retirement," explains Myndi Aven, a wealth management advisor at Northwestern Mutual in Mishawaka, Indiana. "The Saver's Credit functions as a tax break for moderate-income taxpayers who contribute to a retirement account."
"The Saver's Credit functions as a tax break for moderate-income taxpayers."
In fact, the report says only 49% of all workers are familiar with the so-called Saver's Credit and only 40% of part-time workers reported knowing about it. Awareness also varies by gender, with 54% of men, but only 42% of women saying they were familiar with it.
Differences in awareness also vary by educational attainment: 54% of those with a college degree versus 43% of those with a high school diploma or some college were familiar with the tax credit.
Those Who Need It Most Know It Least
Awareness also varies by household income. While 53% of workers making $100,000 or more a year reported knowledge of the tax credit, only 47% of those making $50,000 to $99,000, and 42% of those making less than $50,000 a year said they were aware of the tax credit's existence.
By generation, millennials and GenZ members were most aware of the credit, at 57% and 56%, respectively. The survey found that 43% of GenX members and 33% of baby boomers said they knew about the program. These stats are distressing because the generations closer to retirement seem to be unaware of a benefit that could substantially impact their taxes every year.
"Contributing money to a retirement account and creating a diversified portfolio are both important components toward reaching financial freedom."
However, the highest disparity is actually based on where workers live. While 58% of urban workers (the highest percentage in any category) stated some knowledge of the Saver's Credit, only 45% of suburban workers and 39% of rural workers were aware of its existence.
Unlike a tax deduction, which may reduce your tax liability by a percentage of what you spend on health care, mortgage interest or targeted investments, tax credits are like cash that you can use to pay income tax you may owe. If using the credits result in you overpaying what you owe, you can receive a bigger tax refund now or reduce your tax liability in the future.
And who doesn't want or need extra money — $1,000 or more each year?
Here's what you need to know to claim the 2023 Saver's Credit.
What Is It and How Does It Work?
The Saver's Credit is worth 10%, 20% or 50% of the amount you contribute to a retirement account each year. The percentage depends on your filing status and adjusted gross income, Aven says.
If you are a single filer earning $21,750 or less, the credit applies to the first $2,000 contributed to an eligible retirement account and the maximum credit would be 50% of that contribution, or $1,000. For joint filers earning no more than $43,500, the credit would apply to the first $4,000 of retirement savings, and the maximum credit again would be 50% of that, or $2,000.
According to the IRS, the following contributions are eligible for the Saver's Credit:
- Elective salary deferral contributions to a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE plan.
- Voluntary after-tax employee contributions to a qualified retirement plan (including the federal Thrift Savings Plan) or a 403(b) plan.
- Contributions to a 501(c)(18)(D) plan, an employee funded pension trust created before June 25, 1959.
- Contributions made to an ABLE account for which you are the designated beneficiary.
Rollover contributions are not eligible for the Saver's Credit.
Meant for the Average Worker
In addition to contributing to eligible retirement accounts, the IRS has also established other eligibility requirements.
Adjusted gross income is another factor that determines if you're eligible or not.
"To be eligible to claim the Saver's Credit, you must be 18 years or older; you cannot be claimed as a dependent on another person's tax return and you cannot be a student," Aven says.
As noted earlier, adjusted gross income is another factor that determines if you're eligible or not.
If your filing status is single, you're married but filing separately or you are a qualifying widow, your adjusted gross income cannot exceed $36,500. If you are the head of household, your adjusted gross income cannot exceed $54,750. If you're married and filing jointly, your adjusted gross income cannot exceed $73,000.
How (and why) to Claim the Credit
If you're eligible for the Saver's Credit, Aven says you need to complete IRS Form 8880 to claim it. "You will be asked to include your income and contributions to various types of retirement accounts, such as traditional Roth IRAs, 401(k) accounts, etc.," she explains. "Then, you will calculate your total credit and add it to line 4 of Form 1040."
Whether they're eligible for the Saver's Credit or not, Aven encourages people to save money for retirement.
"Contributing money to a retirement account and creating a diversified portfolio are both important components toward reaching financial freedom," she says. "A financial advisor can help you create a comprehensive retirement plan based on your unique needs and goals to help you create the retirement you envision for yourself and your family."