The Saver’s Credit – A Tax Credit for Retirement Savings
Al Waller: Taxes unite us. How, you ask? Most people don’t like paying taxes – and many don’t like preparing them, either. A survey by Wallet Hub found that 35% of people would rather miss a connecting flight, and 17% would rather swim with sharks than do their taxes. But, as Benjamin Franklin wrote, “In this world, nothing is certain except death and taxes.” And it’s that time of year again.
On this episode of ClearPath – Your Roadmap to Health & WealthSM, we’ll be discussing a bright spot in tax preparation – an underutilized IRS tax credit for retirement savers known as the Saver’s Credit.
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, who can benefit from it, and how to claim 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. This tax credit is in addition to tax deductions and tax-deferred growth available to retirement savers. I know it’s easy to confuse these three types of tax savings, so I think a good place for us to start is by giving a refresher on the tax benefits of saving for retirement.
Al Waller: Works for me. So perhaps you could start by providing us with an explanation of these three tax benefits.
Catherine Collinson: First, when you save for retirement in a qualified retirement plan – that is a 401(k), 403(b), or similar plan or a traditional IRA, you can get a tax deduction on the income that you defer. The deduction lowers your taxable base of income in that year, and you’re taxed on that lower amount. However, you will have to pay income taxes when you take any withdrawals from these accounts in the future, for example, when you retire.
The second tax benefit of saving for retirement in these accounts, as well as Roth IRAs and 401(k)s, is tax-deferred growth, meaning that your savings and investments can grow over time and that you won't be taxed annually on any capital gains within these accounts.
The third tax benefit is the Saver’s Credit, which is a tax credit that lowers your tax bill dollar-for-dollar in the amount of the credit. So, for example, if you owe $1,000 in taxes and are eligible to claim $200 from the Saver’s Credit, then your tax bill is only $800.
Al Waller: So, by claiming the Saver’s Credit, people may actually be able to get a triple tax savings! Why don’t we hear more about this?
Catherine Collinson: Unfortunately, many people are simply not aware of it. In my team’s most recent survey, we found that fewer than half of workers are aware of this important tax credit.
I think this lack of awareness may stem from confusion over the three types of tax benefits. It may just seem too good to be true to get multiple tax benefits out of saving for retirement.
Al Waller: Well, Catherine, I don't know about you, but I was taught at an early age that if something sounds too good to be true, it probably is. Given these circumstances, it’s unfortunate that so many people may be missing out on the Saver's Credit. But then again, all the more reason I'm delighted we're discussing it now. So, to start things off, who's eligible to claim it?
Catherine Collinson: Let me walk you through the eligibility requirements. First of all, the Saver's Credit is available to taxpayers who are saving for retirement in a 401(k), 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 –even if you didn't contribute to a retirement account in 2022, it's not too late. You have up until April 18th, the tax filing date, to open and make a contribution to an individual retirement account, or IRA, and have it count as a 2022 contribution when you do your tax returns.
The Saver’s Credit does have income eligibility requirements or caps, as measured by their Adjusted Gross Income, or AGI.
For 2022, the AGI limit for single tax filers is $34,000. For heads of households, it is $51,000. And, for married filing jointly, it is $68,000. A quick note – these limits will increase in 2023.
Other eligibility requirements for the Saver’s Credit include you must be age 18 or older, not a full time student, and you cannot be claimed as a dependent on another individual's tax returns.
I'd also like to highlight the Saver’s Credit is not refundable, meaning that you are only eligible to claim the amount of a credit up to your tax liability. So, for example, if you don't have a tax liability then you would not be able to claim the Saver’s Credit.
Al Waller: Well, by the sound of it, this could be available to a lot of people. And, if that’s the case, just how much could people expect to lower their taxes by doing this?
Catherine Collinson: The maximum credit amount for individuals is $1,000 and for married filing jointly it’s $2,000. A person’s specific credit amount is based on two factors. The first is how much they contributed to their retirement plan. The second is their AGI. The credit amount is more for lower earners. 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: Paying almost $200 less in taxes would be welcome any year, but particularly this year when so many prices are rising. Now that we know what the Saver’s Credit is, can you tell us how to claim it?
Catherine Collinson: An important thing to know about the Saver’s Credit is that the IRS also calls it “the Qualified Retirement Savings Contribution Credit.” If you're using an online tax preparation tool, it should automatically determine if you’re eligible for the credit and guide you through the process to claim it. The same holds true if you're using a professional tax preparer. But I go by the motto, “Better safe than sorry.” So, if you're using tax preparation software, be on the lookout for it. And if you’re using a tax preparer, be sure to ask about it – just to be sure.
Al Waller: What about for people who are preparing their own tax returns manually or without the benefit of technology – what are the mechanics of claiming the Saver’s Credit for them?
Catherine Collinson: For those who are preparing their tax returns by hand, start by completing the Saver’s Credit form, which is Form 8880, and is called the “Credit for Qualified Retirement Savings Contributions.” Although it’s just a one-page form with about a dozen lines, I personally find it challenging to complete. Based on your answers, you can determine if you’re eligible for the credit, and, if so, what your credit amount is.
You then transfer the information from Form 8880 to Schedule 3 on your Form 1040. From there, complete your Form 1040 by hand as well. That's as quick of a synopsis of completing it by hand without doing a deep dive into tax forms.
Al Waller: Hopefully, it is enough to help them through the process and know what to be on the lookout for. Admittedly, it sounds complicated. Do you have any tips to help people with their tax preparation?
Catherine Collinson: Yes. I have an awesome tip that includes one of my favorite adjectives, “free.” The IRS has a service known as the Free File program. Most taxpayers who are eligible for the Saver’s Credit are also eligible for this program, which makes professional tax preparation software available for free to those with an Adjusted Gross Income or AGI of $73,000 or less. You can learn more about it at irs.gov/freefile.
Al Waller: You and I both love a good deal. It’s great that people can turn to these resources. Before we wrap up today, is there any parting advice you’d like to share with us?
Catherine Collinson: First of all, try to file your taxes early which can speed up any refunds and reduce the chances of somebody filing a fraudulent return in your name.
Secondly, when using the Free File program, compare the products being offered to determine the best one for your situation. For example, the free file program offers a number of different options that also may come with state filings, potentially at a cost. Also, be on the lookout if there might be an additional cost for the Saver’s Credit in the Form 8880. Hopefully, that's not the case. But as we talk about on this show, it's always good to do your homework.
The Saver’s Credit can also be claimed for contributions to ABLE accounts. ABLE accounts are named such as they're designed for Achieving a Better Life Experience. They are tax-advantaged accounts designed for those individuals with disabilities and their families to help save for disability-related expenses, and they are designed to do so without jeopardizing the beneficiary’s eligibility for other federal benefits. To claim the Saver’s Credit, contributions need to be made by the beneficiary of those accounts (vs. a family member). For those who aren’t familiar with ABLE accounts, last year we dedicated an episode of ClearPath – Your Roadmap to Health & Wealth to the topic and I hope you'll check it out here at ABLE savings accounts for people with disabilities.
Lastly, and this is a big one for me and my enthusiasm for saving for retirement, if you do benefit from the Saver’s Credit or get a tax refund, consider depositing it into your retirement account.
Al Waller: Love your plug for retirement savings. Many thanks for your thoughtful insights on today’s topic. In closing, I want to remind listeners even if you didn’t save for retirement last year, it’s not too late. You can still make an IRA contribution all the way to April 18th to qualify as a 2022 contribution.
I’d also like to encourage listeners to check out other episodes of ClearPath – Your Roadmap to Health and Wealth covering topics such as forming new healthy habits and getting financially fit.
For our listeners, if you have ideas for future episodes, comments, or feedback, please email me or Catherine at [email protected]. Don’t forget to subscribe to our podcast so you don’t miss upcoming episodes.
Until the next time, I’m your host Al Waller. Stay safe, be well, and thanks for listening.
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 health and wellness, employment, financial literacy, longevity, and retirement. You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org/podcast.
ClearPath – Your Roadmap to Health & Wealth is produced by the Transamerica Institute with assistance from WYPR.
The information provided here is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance.
