At Tax Time, Remind Workers About the Saver’s Credit

Many eligible employees could benefit from the saver's credit—if they know about it

By Stephen Miller, CEBS Feb 18, 2016
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As tax season approaches each year, employers have an opportunity to inform low- and moderate-income workers that there’s a special tax credit to help them save for retirement.

The saver’s credit, also referred to as the Retirement Savings Contributions Credit, can offset all or part of the first $2,000 that workers voluntarily contribute to a 401(k), 403(b) or similar employer-sponsored retirement plan; to an individual retirement account (IRA); or to a SIMPLE IRA or myRA (my IRA), if their employer participates in providing access to one of these small-business plans.

But just 25 percent of American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 16th Annual Transamerica Retirement Survey.

“The saver's credit is in addition to the tax benefits of contributing pretax dollars to retirement plans. Because this double benefit sounds too good to be true, many eligible savers may be confusing the two incentives,” said Catherine Collinson, president of the Los Angeles-based Transamerica Center for Retirement Studies, a nonprofit research institute funded by Transamerica Life Insurance Co.

“Many eligible employees may be missing out on the saver's credit when filing their tax returns, including workers who have saved in a 401(k) or similar plan in 2015,” Collinson added. “Other workers might have saved had they known about it. But the good news is that it's not too late to contribute to an IRA or the new myRA and claim the saver's credit for 2015. They have until April 18, 2016 to do so.”

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 a maximum of 50 percent of an employee’s 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. Consequently, the maximum saver’s credit is $1,000 (or $2,000 for married couples filing jointly).

Generally, the saver’s credit can be claimed by workers ages 18 years and older who have contributed to a company-sponsored retirement plan or IRA in the past year and meet these income limits for 2015 or, looking ahead, for 2016:

  • For single filers, the AGI limit is $30,500 in 2015 or $30,750 in 2016.
  • For the head of a household, the AGI limit is $45,750 in 2015 or $46,125 in 2016.
  • For those who are married and file a joint return, the AGI limit is $61,000 in 2015 or $61,500 in 2016.

The filer cannot be a full-time student or be claimed as a dependent on another person's tax return.

Caps for Tax Years 2015 and 2016

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.

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

$29,626 - $45,750

$19,751 - $30,500

0% of contribution

more than $61,000

more than $45,750

more than $30,500

 

2016 Saver's Credit

Tax Credit Rate

Married, Filing Jointly

Head of Household

Single/Other Filers*

50% of contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of contribution

$37,001 - $40,000

$27,751 - $30,000

$18,501 - $20,000

10% of contribution

$40,001 - $61,500

$30,001 - $46,125

$20,001- $30,750

0% of contribution

more than $61,500

more than $46,125

more than $30,750

*Includes married couples filing separately or qualifying widow(er)s.

Source: IRS, Retirement Savings Contributions Credit (Saver’s Credit)


For tax year 2015, eligible workers have until April 18, 2016, to set up a new IRA or add money to an existing one. But elective contributions to a 401(k) plan or similar workplace program must have been made by the end of 2015 for employees to claim the credit.

Nevertheless, while employees are focused on their taxes, encourage them to set payroll-deferral retirement plan contributions for this year if they haven’t done so already. That way, if they’re eligible, they’ll be able to claim the saver’s credit on their 2016 taxes next April.

Filing for the Saver’s Credit

Most workers who are eligible to claim the credit are also eligible to take advantage of the IRS Free File program for taxpayers with an AGI of $62,000 or less. Thirteen software companies make their tax preparation software available at no cost at www.irs.gov/FreeFile.

Employers should advise eligible workers to take the following steps to claim the saver's credit, advised Collinson:

If using tax preparation software, including those programs offered through the IRS Free File program, use Form 1040, Form 1040A or Form 1040NR. The credit is not available with Form 1040EZ. “Workers who are eligible to receive the saver's credit are at risk of missing it if they use the wrong tax form,” Collinson warned.

If your software has an interview process, answer questions about the saver's credit, which may be referred to as the Retirement Savings Contributions Credit and/or Credit for Qualified Retirement Savings Contributions.

If preparing tax returns manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your exact credit rate and amount. Then transfer the amount to the designated line on Form 1040, Form 1040A or Form 1040NR.

If using a professional tax preparer, be sure to ask about the saver's credit.

Consider having any refund received directly deposited into an IRA to further boost your retirement savings.

“Encourage workers to tell their colleagues, friends and family about the saver's credit. Many may have contributed to a 401(k) plan or IRA and are eligible receive it, but just don't know about it,” Collinson said. “Among those who are not saving for retirement, the saver's credit might just be the nudge that they need to start.”

The Transamerica Center for Retirement Studies has additional information in English and Spanish on its Saver's Credit page, along with a downloadable fact sheet/poster.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Article:

‘Where’s My 1095?’ Addressing Tax Filing Confusion, SHRM Online Benefits, February 2016

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