This little-known tax credit could give your retirement savings a huge boost

Written by: Myles Ma

July 30, 2022

Fewer than half of U.S. workers are aware of a tax credit that’s “almost too good to be true,” says Catherine Collinson, CEO and president of the Transamerica Institute and Center for Retirement Studies. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is available to eligible taxpayers who make voluntary contributions to eligible retirement accounts. Collinson says the Saver’s Credit acts as a “double tax benefit.” The credit is available on up to $2,000 of contributions for individuals, and can reduce your tax burden by up to $1,000 ($2,000 if married filing jointly).

“If an individual is saving for retirement in a tax-advantaged retirement account like a 401(k), 403(b) or IRA, they’re already getting some tax-advantaged savings if they’re saving on a pre-tax basis,” Collinson says.

The Saver’s Credit reduces your tax bill for saving for retirement, which already comes with tax benefits. It’s available to people 18 or older who have contributed to an eligible retirement plan and meet the income requirements for 2022:

For single filers, a maximum adjusted gross income of $34,000
For heads of household, a maximum AGI of $51,000
For married filing jointly, a maximum AGI of $68,000

Students and anyone claimed as a dependent on someone else’s tax return are ineligible.

The average size of the credit was $191 in 2019, based on Transamerica analysis of IRS data. Every bit of savings can help, especially considering how much money can grow over time if it’s invested, Collinson says.

“For many, it could be an incentive to start saving,” Collinson says. “For others it could be something that’s available that they’re not taking advantage of, simply due to lack of awareness.”

As the economy deals with rising inflation and faces a possible recession, more people may be eligible for the credit because of reduced income, Collinson says. That’s why she and the Transamerica Center for Retirement Studies are trying to make more people aware of the credit.

More people should use the Saver’s Credit

It’s not clear how many eligible people are failing to take advantage of the Saver’s Credit. Collinson says there’s not enough data to get an exact number. But given how low awareness is, it’s clear more people could benefit from it, she says.

Transamerica has run publicity campaigns for the Saver’s Credit for years and has measured the public’s level of awareness since 2007. The 48% level of awareness among workers reached in 2021 represents a high, compared to the low of 20% in 2009 and 2010. The number of tax filers claiming the credit has also increased, from 5.3 million in 2002 to 9.6 million in 2019.

But Collinson says it’s not enough: Employers, as well as the IRS, could do more to make workers aware of this credit.

How to take advantage of the Saver’s Credit

One reason takeup of the Saver’s Credit has increased is its inclusion in tax preparation software, Collinson says. In-person tax preparers have also become more aware of the Saver’s Credit and are more likely to ask about it. If not, be sure to mention it, she says.

“Tax preparation software is getting more sophisticated all the time,” Collinson says. “It’s much more likely to pick it up when someone is filling out their tax questionnaire.”

People who are eligible for the credit are also usually eligible for the IRS Free File program, so they can earn extra money for saving for retirement and save money on tax preparation software.

To increase takeup further, Collinson hopes the IRS makes the Saver’s Credit fully refundable. As of now, you can use the credit to reduce your tax liability, but not to increase the size of your refund. Making it refundable “could open it up to millions more tax filers,” Collinson says, and provide an even bigger incentive to save for retirement.

This article originally appeared on Policygenius.com and was syndicated by MediaFeed.org