The Saver's Credit is based on contributions to a qualified retirement plan, including a traditional or Roth IRA, 401(k), 403(b), 457(b), SIMPLE plan, SARSEP, 501(c)(18)(D) plan, and contributions made to an ABLE account for which you are the designated beneficiary. Rollover contributions from an existing plan do not qualify for the credit.
To qualify for the credit in 2021, adjusted gross income (AGI) can't exceed $66,000 for joint filers, $49,500 for head of household filers and $33,000 for any other filing status. The credit is a maximum $1,000 ($2,000 if married filing jointly). Credit amounts phase out based on AGI and filing status.
IRS Retirement Savings Contributions Credit — 2021 Saver's Credit
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $39,500||AGI not more than $29,625||AGI not more than $19,750|
|20% of your contribution||$39,501 - $43,000||$29,626 - $32,250||$19,751 - $21,500|
|10% of your contribution||$43,001 - $66,000||$32,251 - $49,500||$21,501 - $33,000|
|0% of your contribution||more than $66,000||more than $49,500||more than $33,000|
Unlike a tax deduction, which reduces your taxable income (and therefore your taxes), a tax credit reduces your taxes, dollar for dollar. If you owed $800 in federal income taxes and had a $700 credit, your tax bill would shrink to $100. The credit can reduce your tax bill to zero, but unlike some tax credits, it can't turn a tax bill into a refund. If you owed $500 and had a $700 tax credit, your tax bill would be zero.
Too often overlooked
If all that sounds confusing, experts agree. It's one reason taxpayers’ use of the credit is low.
"So very few people claim it at the moment. It's a little too complicated,” says Ida Rademacher, executive director of the Aspen Institute's Financial Security Program. “But there's still a real opportunity for households who are eligible for it, if they knew about it and would take advantage of it.”
Experts estimate that no more than 5 percent of eligible filers claim the credit. “There's a lot of money being left on the table,” says Dan Doonan, executive director of the National Institute on Retirement Security.
One obstacle is that the credit must be claimed on the long form 1040, but lower-income people are less likely to hire an accountant to tell them about the credit, Doonan says.
"You're making it administratively difficult by requiring the long form,” Doonan says. “If they don't know about this ahead of time, they're likely to miss it.”
Rademacher agrees. “These are extremely low-income households. When you look at a typical tax return, it's a standard deduction kind of process that they're engaged in, usually,” she says. “So the ability to even engage in a conversation about the credits — the nuance and complexity of itemizing your credits — is likely also a small proportion of the households that are in this income bracket that are really clued into these issues.”
The other reason so few people use the credit is that the income thresholds are so low. A person with $33,000 in AGI (or a couple with $66,000 in AGI) may find it extremely difficult to save even $1,000.
State savings plans may help
Another obstacle is taxpayers in the qualifying income brackets may not have access to a retirement account through an employer, and most do not contribute to an IRA on their own. One bright spot that might increase utilization of the Saver’s Credit is the use of automatic, payroll deduction IRA programs, such as state-sponsored retirement programs sometimes called Secure Choice. Under these state-facilitated programs, 3% to 5% of a worker’s salary is automatically deposited into a retirement account. The accounts are considered qualified retirement plans for the Saver’s Credit, making more taxpayers eligible.
These programs work because people are 15 times more likely to save if they have a payroll deduction option in the workplace, said AARP. It’s great that, with AARP support, roughly half the states have either adopted a program or are looking into adopting one. Better still, Congress is looking at creating a federal automatic IRA proposal for the nation that would work in tandem with state programs that also has AARP backing.
Rademacher notes the state programs can open retirement savings to a new population of taxpayers.
“It could be a real boost to a lot more households now, because of the way that the states have expanded their own retirement savings programs,” says Rademacher. “The fact that you've got all of these new retirement savers that have potentially never before saved for retirement, that would be just an ideal opportunity to start to publicize and potentially increase the usage of this credit among lower-income workers.”
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Proposals would make the Saver’s Credit accessible to more taxpayers by increasing the match amount and/or raising the income limit so more people would qualify. AARP, for example, supports proposals to raise the income thresholds to make the credit more accessible to middle-income savers. AARP also supports simplifying the tax-filing requirements and allowing it to be claimed on all tax forms.
Converting the current Saver’s Credit to a refundable credit would also be useful, because lower-income Americans may not have a tax liability to offset the existing credit, Rademacher says. She also wants any refundable credit to be deposited directly into the taxpayer’s retirement account. (Refundable credits allow you to turn a tax bill into a refund; AARP also supports this).
Until any proposals are passed by Congress, advocates aim to raise awareness and increase utilization of the Saver's Credit, especially among people who are 50 and older.
"I think that is exactly the age when you're really gearing into: How are you going to maximize your retirement nest egg? And so the motivation and the focus on retirement savings is going to be high in that group,” Rademacher says. “A lot of the key population that this credit is meant to be helpful to is connected to workers in their 50s and 60s who are still working. So it would be incredibly important in terms of just making sure that they can receive it.”
Doonan and Rademacher note retirement savings incentives are generally skewed toward higher-income earners, who can get a bigger tax break on, say, 401(k) contributions because they are in a higher tax bracket. The Saver’s Credit helps level the playing field, a bit. "Expansion of the Savers Credit is really targeted at helping low and moderate income persons to increase their savings for retirement," says David Certner, legislative policy director at AARP.
“We have a system that works in this country for helping families build retirement savings, but it doesn't work for everyone,” says Rademacher. “The savers credit is the one tool, small and currently less effective than it needs to be, that specifically addresses the savings needs of low- and moderate-income households. And we need to do more to both ensure that the existing credit actually delivers some amount of support to households, and that it becomes a priority to fix it so that it can help even more.”
Sharon Waters, a former CPA, has written for Wired.com and other publications.