Savings credit: a tax credit to promote retirement security
Did you know the IRS offers a tax credit that helps people save for retirement? If not, you are not alone.
Less than half of American workers are aware of the savings loantax credit available to low-to-middle-income taxpayers who contribute to tax-advantaged accounts, new survey finds research report led by my team at the Transamerica Center for Retirement Studies® (TCRS) in collaboration with Transamerica® Institute.
As our country faces major retirement security concerns amid relatively low levels of retirement savings and the estimated depletion of Social Security Trust Funds in 2034, savings credit can play an even bigger role in helping people save for retirement.
What is the Savings Loan?
The saver’s credit, called the Retirement Savings Contributions Credit by the IRS, is a tax credit that goes beyond the tax-advantaged treatment of retirement accounts. It can be applied to the first $2,000 of voluntary contributions that an eligible taxpayer makes to an employer-sponsored 401(k), 403(b), or similar retirement plan; a traditional or Roth IRA; or an ABLE account within the past year.
The maximum credit is $1,000 for single filers or individuals and $2,000 for joint filers. The amount of the tax credit is 50%, 20% or 10% of the taxpayer’s contributions to eligible accounts for the year, and the percentage also depends on his income.
The adjusted gross income limits for the 2022 tax year are:
- $34,000 for single filers.
- $51,000 for heads of families.
- $68,000 for those who are married and file jointly.
Additionally, the taxpayer must be 18 or older, cannot be a full-time student, and cannot be claimed as a dependent on another person’s tax return. It is important to note that the saver’s credit is non-refundable, which means that the taxpayer can only benefit from the credit up to the amount of his tax payable.
The IRS offers a online tool to help you determine if you qualify for the credit.
History of Savings Credit
The Saver’s Credit was established with the enactment of the Economic Growth and Fiscal Reconciliation Act 2001 and made permanent with the Pension Protection Act 2006, both Acts being the culmination of efforts longstanding bipartisan efforts to improve retirement security. Savings Credit was the first major legislation focused on promoting tax-qualified retirement savings among low- to middle-income workers.
According to TCRS analysis of the IRS Income Statistics, the number of filers claiming the Saver’s Credit rose steadily to 9.6 million in 2019, the most recent year for which IRS data is available, from 5.3 million in 2002. 2019, 6.1% of all filers and 9.3% of tax filers with taxable returns claimed the credit. The average loan amount was $191. Please note that no data is available to accurately estimate the number of filers who might have qualified for the credit.
Since its inception, policy experts have pointed out that the number of people benefiting from the credit is limited because it is non-refundable, which means the amount of the credit cannot exceed a person’s tax liability. taxpayer – and many low-to-middle-income workers are subject to little or no tax. The TCRS agrees with this assessment, but also believes that many eligible workers may be missing out on Saver’s Credit simply because they don’t know it.
The awareness imperative
Without widespread awareness, eligible individuals saving for retirement may unwittingly overlook Saver’s Credit when preparing their tax returns. Among those who are not yet saving, learning about the saver’s credit could be the boost to launch them.
According to TCRS survey results, credit awareness among workers employed by for-profit companies increased from 23% in 2007 to 48% in 2021. However, recent survey results highlighted major disconnects among segments of this population.
Low- and moderate-income workers, the intended recipients of the credit, are less likely to be aware of it. In 2021, only 41% of workers with an annual household income (or HHI) of less than $50,000 were aware of the credit, compared to 55% of workers with an HHI of $100,000 or more. Part-time workers (40%) and women (41%) were also less likely to be aware.
Employer-sponsored workplace pension plans have proven to be the most effective way to incentivize workers to save for retirement and qualify them to potentially benefit from the Saver’s Credit. According to the same survey results, nearly three in four workers (73%) are offered a 401(k) or similar plan. Yet only 51% of part-time workers, 60% of workers with HHIs below $50,000, and 69% of female workers are offered a plan.
These disparities and other contributing factors translate into large differences in retirement savings among at-risk segments and illustrate the useful role that saver credit can play in promoting savings.
The TCRS found that workers with an HHI of less than $50,000 saved $3,000 in all household retirement accounts, compared to savings of $172,000 among those with an HHI of $100,000 or more. (estimated medians). Moreover, part-time workers report saving less than half that of full-time workers, and women’s retirement savings continue to be a fraction of those of men.
Improve and extend the saver’s credit
Policymakers are currently considering bipartisan pension legislation and considering a variety of reforms that could improve the reach and effectiveness of saver credit, and they should be applauded for their efforts. The TCRS encourages them to consider the following recommendations that could help more Americans benefit from credit and improve their retirement prospects:
- Set up educational campaigns to promote savings credit and how to claim it.
- Make the savings credit refundable so that all retirement savers who meet income limits and other eligibility requirements, whether or not they are subject to tax, can fully benefit from it.
- Simplify and consolidate the three current credit rates, i.e. 50%, 20% and 1%, within income requirements into a single credit rate of 50%.
- Increase income eligibility limits so that more workers can benefit from the credit.
- Elimination of the non-income-related eligibility requirement of being 18 or older, not being a full-time student, and cannot be claimed as a dependent on an employer’s tax return another person.
In addition to public policy efforts, we can all help promote saver’s credit through a grassroots effort by letting our families, friends and colleagues know about it. By spreading the word, we can make a meaningful difference in people’s lives and in the future well-being of our community.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Catherine Collinson is CEO and President of the nonprofit Transamerica Institute and its operating division Transamerica Center for Retirement Studies, and is a champion for Americans at risk of not achieving a financially secure retirement.
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