For many low- to moderate-income Americans, the path to a secure retirement can be impeded by financial hurdles. One of the most overlooked opportunities for easing this burden is the retirement savings contributions credit, commonly referred to as the saver’s credit. This tax incentive is designed to help individuals who contribute to retirement accounts such as Individual Retirement Accounts (IRAs) or workplace 401(k) plans. Despite its potential value—up to $1,000 for single filers and $2,000 for couples filing jointly—this credit remains a well-kept secret among eligible taxpayers.
The importance of this credit cannot be overstated, especially as it serves to encourage retirement savings among those who might find it difficult to set aside funds. It aims to incentivize participation in retirement savings by offsetting contributions, yet it is perplexing how little awareness surrounds it. According to industry experts, many potential beneficiaries are entirely oblivious to its existence, resulting in a mere 5.8% of tax returns claiming this beneficial credit in 2022, according to IRS data.
Despite being a critical tool for enhancing retirement saving among lower-income groups, the saver’s credit is notably underutilized. A survey conducted by the Transamerica Center for Retirement Studies revealed that only about half of U.S. workers know about the incentive, with the awareness plummeting to just 44% amongst taxpayers earning less than $50,000 annually. Emerson Sprick, associate director for the Bipartisan Policy Center’s Economic Policy Program, highlights that the awareness level is alarmingly low, particularly among those who qualify for the credit.
Such apathy towards claiming the saver’s credit can largely be attributed to a lack of understanding of the tax benefits available. Many eligible individuals fail to see the connection between their retirement contributions and the potential tax relief offered by the credit. As with any financial benefit, knowledge and education are paramount in facilitating its effective utilization.
The mechanics of the saver’s credit can be somewhat intricate, with statutory stipulations that delineate eligibility and credit amounts based on adjusted gross income (AGI). For the 2024 tax year, single filers must have an AGI below $23,000 to qualify for the maximum credit, while married couples filing jointly must keep their AGI below $46,000. Notably, those with higher incomes still qualify for a reduced credit, but the percentages gradually decrease with rising earnings.
In practical terms, the saver’s credit allows filers to receive a dollar-for-dollar reduction of their taxes owed based on qualifying contributions, effectively reducing their tax burdens or potentially increasing their refunds. However, the fact that it is non-refundable means that taxpayers with a zero tax liability won’t benefit from this incentive, which further complicates its attractiveness and accessibility.
Recognizing the shortcomings of the saver’s credit, lawmakers have enacted reforms intended to enhance retirement savings among Americans. One such initiative is the introduction of the “saver’s match,” set to take effect in 2027 through the Secure 2.0 legislation. This new program aims to streamline the process, directly depositing funds into qualifying taxpayers’ accounts, reducing the complexity and increasing accessibility.
As we look to the future, fostering engagement and understanding of available savings incentives will be crucial to helping low- to moderate-income Americans bolster their retirement savings. The saver’s credit, albeit a hidden gem, highlights a broader issue of financial literacy and accessibility in retirement planning. Addressing these barriers can empower more individuals to take control of their financial futures, ensuring a more secure and stable retirement for all.