The Saver’s Credit Explained
Al Waller: In the immortal words of Benjamin Franklin, “In this world, nothing is certain except death and taxes.” And it’s hard to believe that dreaded time of year – tax season – is upon us once again.
On this episode of ClearPath – Your Roadmap to Health & Wealth℠, we’ll be discussing what could be a bright spot for many this tax season – a little-known 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.
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, hypothetically, 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: By claiming the Saver’s Credit, people may actually be able to get a triple tax benefit! 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. For many, it may just sound 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. 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.
The Saver’s Credit does have income eligibility requirements or caps, as measured by their Adjusted Gross Income, or AGI.
For 2023, the AGI limit for single tax filers is $36,500. For heads of households, it is $54,750. And, for married filing jointly, it is $73,000. A quick note – these limits will go even higher for 2024.
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 income earners. Our team did an analysis of the 2020 Statistics of Income data from the IRS and found that the average amount of the credit claimed was almost $190.
Al Waller: Receiving a $190 tax break would be welcome any year, but particularly this current environment of inflation and high prices. Question: What if someone didn’t save for retirement in 2023? Is it too late for them to benefit from the Saver’s Credit?
Catherine Collinson: I have some good news –even if you didn't contribute to a retirement account in 2023, it's not too late. You have up until April 15, 2024, the tax filing date, to open and make a contribution to an individual retirement account, or IRA, and have it count as a 2023 contribution when you do your tax returns.
Al Waller: Now that we’ve outlined the Saver’s Credit, 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 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, this is enough to help guide our listeners through the process and know what to be on the lookout for. Admittedly, it sounds complicated. It sounds to me that using tax preparation software would be a lot easier. Do you have any tips to help people with their tax preparation?
Catherine Collinson: Yes. 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. 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: My first tip is when shopping for tax preparation software or if pursuing the IRS Free File program, compare the available products to determine the best one for your situation. Be on the lookout if there is an additional cost for the Saver’s Credit and the Form 8880. As we often talk about on this show, it's always good to do your homework.
My second tip is to file your taxes early, which can speed up any refunds and reduce the chances of somebody filing a fraudulent return in your name.
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 a 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 in 2023, it’s not too late. You can still make an IRA contribution all the way to April 15, 2024 to qualify as a 2023 contribution.
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 retirement security and the intersections of health and financial well-being. 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.
