Many Americans with low to moderate incomes may be missing out on a valuable tax break designed to encourage retirement savings. Known as the retirement savings contributions credit, or saver’s credit, this benefit is not widely claimed according to financial experts.
This credit can help offset contributions to retirement savings accounts like IRAs or 401(k) plans, offering a tax break of up to $1,000 for single filers. The good news is, even if you didn’t contribute last year, you can still make qualifying deposits into an IRA by April 15 and potentially claim the credit on your 2024 tax returns.
However, Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies, points out that “the saver’s credit is a well-kept secret.”
In fact, a survey by the same center showed that only about half of U.S. workers are aware of this credit. The survey, which reached over 10,000 American adults in the fall, found that this awareness drops to 44% among households earning under $50,000 annually.
Experts have noted that awareness of the saver’s credit is generally low, especially among those most likely to benefit from it. Emerson Sprick from the Bipartisan Policy Center stated that only about 5.8% of tax returns utilized the credit in 2022, with the average credit being just $194.
### Understanding the Saver’s Credit
The saver’s credit allows eligible taxpayers to receive a reduction on taxes of up to 50% for retirement contributions, with a cap of $2,000 for individuals and $4,000 for couples. This can translate to maximum credits of $1,000 or $2,000, respectively. It provides a straightforward reduction on the taxes you owe but isn’t beneficial for anyone with no tax liability.
Sprick emphasized that the formula for calculating this credit can be complicated. Eligibility phases out depending on your income and filing status, impacting whether you can claim 50%, 20%, or 10% of your contribution. The IRS offers tools to help determine if you qualify.
For example, in 2024, to receive the 50% credit, adjusted gross incomes must be no more than $23,000 for single filers or $46,000 for married couples. This credit phases out entirely once individual earnings exceed $38,250 or joint earnings surpass $76,500.
### Changes on the Horizon
Given its limited utilization and the lack of awareness among taxpayers, the saver’s credit is scheduled for an overhaul. The Secure 2.0 Act, which will take effect in 2027, will replace this credit with the “saver’s match.” This new initiative will involve direct deposits into taxpayers’ accounts, Sprick noted.
While there are high hopes that the saver’s match will simplify the process, Sprick warns that “there are a lot of logistics that remain to be worked out.”
