An important (and frustrating) point about the coverage gap is that despite industry outreach and education efforts, too many American workers and their employers are simply unaware of the benefits and incentives available to encourage them to save for retirement.
The Saver’s Credit, also called the Retirement Savings Contributions Credit from the Internal Revenue Service (IRS), is one. It’s available to millions of taxpayers who are saving for retirement, yet more than half of workers are unaware it exists, according to the Transamerica Center for Retirement Studies (TCRS).
Further, workers with a household income of less than $50,000—more likely to be eligible for the credit—are less likely to be aware of it.
Beginning in 2027, SECURE 2.0 replaces the Saver’s Credit with the Saver’s Match, a matching contribution from the federal government for retirement savers meeting income and other eligibility requirements. The Saver’s Match will be 50% of a worker’s retirement plan or IRA contributions up to $2,000, representing a maximum match of $1,000.
The change is a further reason for increasing employee and employer awareness.
“We’ve been tracking Savers Credit awareness since around 2007 and 2008,” TCRS President and CEO Catherine Collinson said. “The good news is that more people are aware of it now than 15 years ago, but we still have a long way to go. And what’s troubling is that workers who are more likely to be eligible for the Savers credit are less likely to be aware of it.”
She added that tax season is an excellent time for plan sponsors and providers to help spread the word, and why she’s speaking out now.
A recent (and frequent) target of academia is the tax incentives inherent in 401(k) and similar styled retirement plans, which critics claim are geared to high-income earners and an argument Collinson called “interesting.”
“Part of the awareness issue does stem from lower-income workers are less likely to be offered retirement benefits than higher-income workers; part-time workers also, though SECURE 1.0 and SECURE 2.0 try to address that,” she conceded. “I am optimistic, of course [that the legislation will significantly close the coverage gap]. I think I’m part of a large choir that would like to close the coverage gap even faster. SECURE has provisions that are really going to help with that.”
Referencing part-time workers—or more specifically, Long-Term, Part-Time Employees (LTPTE)—she mentioned the incentives for small businesses not currently offering a plan to do so or to join a pooled employer plan (PEP).
“And the state-facilitated retirement programs have come into their own and been in existence long enough. We’re going to start getting some empirical data from them, and that’s going to be really exciting as well.”
Surprisingly, she isn’t overly concerned about various proposals to have the federal government be more involved in (or completely takeover) the country’s retirement savings system. Examples include the Retirement Savings for Americans Act of 2023 (RSAA), a Thrift Savings-like Plan for private sector workers that the bill’s sponsors claimed would “help low- and middle-income Americans build wealth and save for retirement.”
Yet, the bill’s opponents claimed it would crowd out the private retirement plan market in favor of a complete public takeover, mainly because of the inclusion of a government-provided 5% federal match (1% non-elective and 4% safe harbor).
They note the government would only pay the employer match for those participating in the proposed federally-run retirement plan. In contrast, employers with their own plans must pay the match themselves. Critics say this would unfairly incentivize plan sponsors to abandon their private sector plans for the government option.
“My sense is this is that the federal government has its hands full with a number of really big topics,” Collinson countered. “Just looking at the practicality and huge priorities they’re facing, the real key with the private sector where we’re at right now is expanding coverage, and we’re seeing progress there. Is it happening quickly enough? I think we’d all like to see it happen even faster. So that’s my take on it.”
She mentioned the Social Security solvency issue making headlines and the estimated depletion of funds in roughly 10 years.
“Addressing that will be and has to be a federal priority,” she explained. “One of the things we have to do as a nation is understand the potential role of mandates or required savings and whether they play a role. It will be really interesting to get the empirical data from the state-facilitated programs, some of which do have mandates, and what the outcomes look like.”
What Is the Saver’s Credit?
The Saver’s Credit is a non-refundable tax credit that may be applied up to the first $2,000 of voluntary contributions an eligible taxpayer makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE (Achieving a Better Life Experience) account.
In this context, “non-refundable” means the credit cannot exceed a person’s federal income tax for the year. The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples filing jointly.
According to TCRS’ analysis of the most recently published IRS data, the average amount of the Saver’s Credit in 2021 was $191.
Who Can Claim the Saver’s Credit?
The credit is available to individuals ages 18 years or older who have contributed to a 401(k), 403(b) or similar employer-sponsored retirement plan, a traditional or Roth IRA, or an ABLE account in the past year and meet the Adjusted Gross Income (AGI) requirements:
- Single tax filers: maximum AGI of $36,500 in 2023 and $38,250 in 2024;
- Heads of households: maximum AGI of $54,750 in 2023 and $57,375 in 2024; and,
- Married filing jointly: a maximum AGI of $73,000 in 2023 and $76,500 in 2024.
Additionally, the tax filer cannot be a full-time student and cannot be claimed as a dependent on another person’s tax return.
Tips for Claiming the Saver’s Credit
- Consider using the IRS’ online tool to help determine if you are eligible for the credit.
- If you use an online tax preparation tool to prepare your tax return, including those offered through the IRS Free File program, be sure to answer questions about the Saver’s Credit, also referred to by the IRS as the “Retirement Savings Contributions Credit,” and “Credit for Qualified Retirement Savings Contributions.” Be sure to comparison shop among vendors included in the IRS Free File program and commercially available tax preparation software. Many charge a fee for claiming the Saver’s Credit.
- If you prepare your tax return manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your exact credit rate and amount. Then transfer the amount to line 4 on Schedule 3, used with Forms 1040, 1040-SR, and 1040-NR.
- If you use a professional tax preparer, be sure to ask about the Saver’s Credit.
If you get a refund, consider directly depositing it into an IRA to boost your retirement savings.
