Saver’s Credit – Boost Your Retirement Savings
Al Waller: Well folks, tax filing season is here again and on this episode of ClearPath – Your Roadmap to Health & Wealth SM, we’ll be discussing an underutilized IRS tax credit for retirement savers known as the Saver’s Credit that many Americans just may be missing out on simply because they’re unaware of it.
I’m your host, Al Waller and joining me today is Catherine Collinson, CEO and president of nonprofit Transamerica Institute® and its Transamerica Center for Retirement Studies, to explain the Saver’s Credit and how to go about taking advantage of it.
So, Catherine, what exactly is the Saver’s Credit, and what do we need to know?
Catherine Collinson: In a nutshell, the Saver's Credit is a tax credit that pays to save for retirement, and unfortunately, too many people simply are not aware of it. Our team did a survey late last year and found that fewer than half of workers are aware of this important tax credit.
Al Waller: That’s interesting – why do you think there’s this general lack of awareness out there?
Catherine Collinson: I have a theory or a hypothesis and that is, I think people may be confusing tax credits with tax deductions and tax-deferred growth. They may be confusing these things because they're actually available to retirement savers who are saving in a 401(k) or similar plan or IRA, and it may just seem too good to be true to get multiple tax benefits out of this type of savings.
So, if you’re up for it, I think it might be helpful for our listeners to do a quick refresher on the tax benefits of saving for retirement.
When you save for retirement in a qualified retirement plan – that is a 401(k), 403(b), or similar plan or IRA, especially a traditional IRA, you can get a tax deduction on the income that you defer that lowers your taxable base of income in that year, and then you’re taxed at that lower amount. Of course, later on when you take withdrawals from your retirement savings when you retire, you'll be taxed on them, but at least in present year you won't be taxed on them.
Another tax advantage of saving for retirement in these accounts is tax deferred growth, meaning that your savings and investments can grow over time and that you won't be taxed annually on capital gains.
The Saver’s Credit is a tax credit that lowers your tax bill dollar by dollar for the amount of the credit. So, for example, if you owe $1,000 in taxes and are eligible to claim $400 from the Saver’s Credit, then your tax bill is only $600.
Al Waller: That sounds fantastic! I mean, who wouldn’t go for that, right? So, let’s take a look at who is eligible.
Catherine Collinson: Again, it's available to taxpayers who are saving for retirement in a 401(k) or 403(b) or similar plan or in a traditional or Roth IRA. Important note: rollover IRAs are not eligible for the credit.
And I want to point out some good news because even if you didn't contribute to a retirement account in 2021, it's still not too late. You have all the way until April 18th, the tax filing date, to open and make a contribution to an individual retirement account and have it count towards 2021 when you do your tax returns. I also want to point out the eligibility requirements for the Saver’s Credit. There are income eligibility requirements that relate to adjusted growth income, that's AGI.
For 2021, the limit for single tax filers is $33,000, for head of household it is $49,500, and for married filing jointly the annual adjusted growth income limit is $66,000. A quick note – these limits will go up a little bit in 2022. To be eligible for the Saver’s Credit, you also have to be 18 or older, not a full-time student, and you cannot be claimed as a dependent on another individual's tax returns.
Al Waller: Yes, and I think the point you made too, is the tax date is actually April 18th because of Easter, as opposed to typically what we associate, April 15th.
Well, by the sound of it, this could be available to a lot of Americans. And, if that’s the case, just how much could people expect to lower their taxes by doing this?
Catherine Collinson: The maximum amount of available credit for individuals is $1,000.00 and for married filing jointly it’s $2,000.00. The amount you can actually claim as the credit will depend on the amount that you have contributed to your 401(k), 403(b), or IRA and is also relative to where you stand within the income eligibility requirement. Our team did an analysis of the 2019 Statistics of Income data from the IRS and found that the average amount of the credit claimed was about $190.
Al Waller: How do people claim the Saver’s Credit? And by the way, I’m really hoping there’s an easy answer, Catherine.
Catherine Collinson: Well, yes after all this very dense sort of technical/numbers, tax-related detail, I think there is an easy answer – of course, easy is a relative term when we're talking about taxes.
The easy answer is if you're using tax preparation software, chances are it's going to catch it, but just to be sure, be on the lookout for the Qualified Retirement Savings Contribution Credit. And if you're using a professional tax preparer, be sure to mention it. Chances are they're well aware of it, but it never hurts to ask.
Another really important opportunity I want to point out for listeners is, the IRS has what's called the IRS Free File program. It is available to eligible tax filers with an adjusted gross income or AGI of $72,000. And what is the Free File program? Well, if your AGI is $72,000 or less the IRS makes available professional tax preparation software for free on its website. And you can learn more about the Free File program on irs.gov/freefile.
Al Waller: Well, who says that nothing good in life comes free, especially from the government? That is good news.
Could you now walk our listeners, who are preparing their own tax returns and interested in learning more, through the mechanics of claiming the Saver’s Credit?
Catherine Collinson: For individuals filing their taxes old school and doing it manually by hand, there are a couple of important steps. One is you have to complete the Form 8880, which is the Credit for Qualified Retirement Savings Contributions, and there you have to fill it out with a number of details. Then from there you can determine the credit rate and amount.
Then what you need to do is transfer this information from that Form 8880 to your Form 1040. That's as quick of a synopsis as I can give without doing a deep dive into tax forms. So, hopefully, that's enough to let listeners know what it’s about.
Al Waller: Well, that sounds “not so simple.” So, I’m thinking this probably makes a pretty strong case for using the IRS Free File program, or if you have the means, enlisting a professional tax preparer.
Now, what else should our listeners know?
Catherine Collinson: An important detail for our listeners is in 2018, the Saver’s Credit was expanded beyond retirement savings to include contributions to what are called ABLE accounts. It was expanded to include contributions to ABLE accounts that are contributions made by the beneficiary of those accounts.
Now you may be wondering what is an ABLE account. In short, they are tax advantaged savings to help individuals with disabilities and their families save for disability related expenses without jeopardizing the beneficiary’s eligibility for other federal benefits. We’ll be discussing ABLE accounts in another episode of ClearPath – Your Roadmap to Health & Wealth.
Al Waller: And I look forward to that conversation as well, Catherine.
Again, many thanks for the insights you’ve provided today. Taxes are complicated, but at least it appears the IRS is stepping up and encouraging saving for retirement and at the same time, working to make filing easier with its Free File program. And to borrow a line from Martha Stewart: “That’s a good thing!”
So, in closing, I want to remind folks again that even if they didn’t save for retirement last year, it’s not too late. They can still make an IRA contribution all the way to April 18th to qualify as a 2021 contribution.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being. You can find our weekly podcast on WYPR’s Podcast Central and mobile app, wherever you get your podcasts, and at transamericainstitute.org.
We hope you’ll join us for future episodes, including the upcoming episode detailing ABLE accounts.
Until the next time, I’m your host Al Waller. Stay safe, be well and thanks for listening.
Clearpath is produced by the Transamerica Institute with assistance from WYPR.
