Not a Member?  Become One Today!

 
Remind Eligible Employees About Saver's Tax Credit
 

By Stephen Miller, CEBS  1/26/2015
Copyright Image Permissions
 

updated 2/3/2015

As tax season approaches each year, employers have an opportunity to inform low- and moderate-income workers that there's a special tax credit that can help them save for retirement.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to 401(k) plans, similar  workplace retirement programs or individual retirement accounts (IRAs). Also known as the Retirement Savings Contributions Credit, the saver’s credit is available along with any other tax savings that apply.

But Transamerica Center for Retirement Studies’ (TCRS) research shows that only 24 percent of American workers with annual household incomes of less than $50,000 are aware of the saver’s credit.

“The saver’s credit is a tax credit that reduces an eligible taxpayer’s federal income tax, making it a meaningful incentive for low- to moderate-income individuals and households to save for retirement in a 401(k), 403(b), or IRA,” said Catherine Collinson, president of the nonprofit TCRS. “Unfortunately, many eligible workers may be missing out on the saver’s credit because they are unaware of it, including workers who have saved in a 401(k) or similar plan in 2014 who may miss it when filing their tax returns. Other workers might have saved had they known about it.”

Plan Contributions

For tax year 2014, eligible workers have until April 15, 2015, to set up a new IRA or add money to an existing one. However, elective deferrals (contributions) must have been made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.

Workers who were unable to set aside money for 2014 may want to schedule their 2015 contributions soon so their employer can begin withholding them.

Eligibility Rules

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. The amount of the credit is up to 50 percent of retirement plan contributions of up to $2,000 (or $4,000 for married couples filing jointly), depending on the filer's adjusted gross income (AGI), as reported on their Form 1040 or 1040A. Although this means the maximum saver’s credit is $1,000 (or $2,000 for married couples filing jointly), the IRS cautioned that it is often much less and, due to the impact of other deductions and credits, may not be available to some taxpayers.

Generally, the saver’s credit can be claimed by:

  • Married couples filing jointly with incomes of up to $60,000 in 2014 or $61,000 in 2015.

  • Heads of household with maximum incomes of $45,000 in 2014 or $45,750 in 2015.

  • Singles and married individuals filing separately with incomes of up to $30,000 in 2014 or $30,500 in 2015.

Form 8880, which is used to claim the saver’s credit, has instructions that outline how to correctly calculate the credit. 

2014 Saver's Credit

Tax Credit Rate

Married, Filing Jointly

Head of Household

Single/Other Filers*

50% of contribution

AGI not more than $36,000

AGI not more than $27,000

AGI not more than $18,000

20% of contribution

$36,001 - $39,000

$27,001 - $29,250

$18,001 - $19,500

10% of contribution

$39,001 - $60,000

$29,251 - $45,000

$19,501 - $30,000

0% of contribution

more than $60,000

more than $45,000

more than $30,000


2015 Saver's Credit

Tax Credit Rate

Married, Filing Jointly

Head of Household

Single/Other Filers*

50% of contribution

AGI not more than $36,500

AGI not more than $27,375

AGI not more than $18,250

20% of contribution

$36,501 - $39,500

$27,376 - $29,625

$18,251 - $19,750

10% of contribution

$39,501 - $61,000

$29,625 - $45,750

$19,751 - $30,500

0% of contribution

more than $61,000

more than $45,750

more than $30,500


*Married couples who are filing separately or qualifying widow(er)s.

Source: Internal Revenue Service.


A Savings Incentive

In 2012, the most recent tax year for which complete figures are available, saver’s credits totaling just over $1.2 billion were claimed on nearly 6.9 million individual income-tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $165 for heads of household and $127 for single filers.

The saver’s credit supplements other tax benefits available to people who set aside money for retirement. For example, most contributions to traditional 401(k) and similar workplace plans, or to a traditional IRA, are not taxed until employees withdraw funds. Roth 401(k) or Roth IRA contributions are not deductible, but qualifying withdrawals, usually after retirement, are tax-free.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.

  • Anyone claimed as a dependent on someone else’s tax return cannot take the credit.

  • A student cannot take the credit (anyone enrolled as a full-time student during any part of five calendar months during the year is considered a student).

Certain retirement plan distributions reduce the contribution amount used to determine the credit. For 2014, this rule applies to distributions received after 2011 and before the due date, including extensions, of the 2014 return. Form 8880 and its instructions have details on making this computation.

Created in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the credit’s value, income limits are now adjusted annually to keep pace with inflation.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related SHRM Article: 

 Quick Links: 

 

Compensation & Benefits e-Newsletter:
To subscribe to SHRM's weekly Compensation & Benefits
e-newsletter,  click below.
Sign Up Now

 

Copyright Image Permissions

TOP PICKS: LEGAL & REGULATORY DEVELOPMENTS

Swipe for more!


Sections