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Saver’s Credit: Understanding the Retirement Savings Contribution Credit

The Saver’s Credit is an excellent incentive for your employees to contribute to your retirement plan. Here’s how to answer the most frequently asked questions.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Apr. 15, 2020
Published Apr. 15, 2020
4 min read

What if your employees could receive a tax credit just for saving for retirement? It sounds too good to be true, but it actually is real! It’s called the Retirement Savings Contribution Credit, more commonly known as the Saver’s Credit.

The Saver’s Credit is an excellent incentive for your employees to contribute to your retirement plan; however, they may not even know about it! In fact, only about 12% of eligible taxpayers claim this credit!

Want to get the word out about the Saver’s Credit? Here’s how to answer your employees’ most frequently asked questions.

1.  What is the Retirement Savings Contribution Credit or Saver’s Credit?

The Saver’s Credit gives a tax break to low- and moderate-income taxpayers who are saving for retirement. If you qualify for this special credit, it could reduce (or even eliminate) your income tax bill. That’s because it’s not a tax deduction, it’s a tax credit. Wondering what the difference is between the two? Here’s how it works:

  • A tax deduction reduces your taxable income, and you pay taxes on the remaining taxable income.
  • A tax credit directly reduces the amount of taxes you owe. That means it’s far more valuable than simply a tax deduction!

The Saver’s Credit is non-refundable, which means it can only be subtracted from your tax liability—and potentially zero out your income tax bill—but it can’t provide you with extra money from the US Treasury. So if you owe $900 but you have a $1,000 Saver’s Credit, you won’t have to pay a dime to Uncle Sam (but the other $100 tax credit is lost).

Plus, this special credit is above and beyond any tax deductions you may receive by making a 401(k) or Traditional IRA contribution!

2.  Am I eligible for the credit?

You’re eligible for the credit if you:

  1. Are age 18 or older
  2. Are not a full-time student
  3. Are not claimed as a dependent on another person’s return
  4. Made before-tax or after-tax retirement contributions to an eligible plan
  5. Met the Saver’s Credit adjusted gross income (AGI) qualifications (For the 2020 tax year, it’s less than $65,000 if you file “married filing jointly,” less than $48,750 if you file “head of household,” and less than $32,500 if you file “single,” “married filing separately,” or “qualifying widow(er).”)

3.  Which retirement accounts are eligible for the Saver’s Credit?

You can potentially claim a Saver’s Credit for your eligible contributions if you contribute to one (or more) of the following popular plans:

  • 401(k)
  • IRA (Traditional IRA or Roth IRA)
  • SIMPLE IRA
  • 403(b)
  • 457 plan

For additional details on eligible account types, refer to the IRS website.

What’s not eligible?

If you received any employer contributions (such as a company match), you can’t claim those contributions for the credit. Rollover contributions (money that you transferred from another retirement plan) also aren’t eligible for the Saver’s Credit.

4.  How much is the credit worth?

The credit amount is calculated on a sliding scale. Depending upon your income (as reported on your Form 1040 series return), you’ll receive a tax credit of 50%, 20% or 10% of your qualified retirement savings contributions.

The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), which means your maximum credit is $1,000 ($2,000 if married filing jointly).

As you’ll see in the chart below, the income brackets vary depending upon your tax filing status: Married filing jointly, head of household, single, married filing separately, or qualifying widow(er). Review the following charts for information on the specific income brackets and credits for tax year 2019 and 2020.

2019 Savers Credit

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $38,500 AGI not more than $28,875 AGI not more than $19,250
20% of your contribution $38,501 – $41,500 $28,876 – $31,125 $19,251 – $20,750
10% of your contribution $41,501 – $64,000 $31,126 – $48,000 $20,751 – $32,000
0% of your contribution more than $64,000 more than $48,000 more than $32,000

 

2020 Saver’s Credit

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $39,000 AGI not more than $29,250 AGI not more than $19,500
20% of your contribution $39,001 – $42,500 $29,250 – $31,875 $19,501 – $21,250
10% of your contribution $42,501 – $65,000 $31,876 – $48,750 $21,251 – $32,500
0% of your contribution more than $65,000 more than $48,750 more than $32,500

 

*Single, married filing separately, or qualifying widow(er)

5.  Can you give me an example of how the Saver’s Credit works in the real world?

Take these scenarios for example:

Sam and Jil

Sam and Jill have been married for 10 years. Sam was unemployed in 2020, and Jill earned $57,000 from her job at the bank. Jill contributed $2,000 to her 401(k) plan in 2020. After deducting her 401(k) contribution, their AGI on their joint return was $55,000. According to the 2020 Saver’s Credit chart, couples who file as “married filing jointly” and have an AGI between $42,501 and $65,000, may claim a tax credit, which is equal to 10% of their retirement contribution. Therefore, Sam and Jill may claim a 10% Saver’s Credit—$200—for Jill’s $2,000 401(k) plan contribution.

Monica

A recent college grad, Monica earned $32,000 in 2020. To help save for her future, she contributed $2,000 to her 401(k). After deducting her contribution, her AGI on her tax return was $30,000. According to the 2020 Saver’s Credit chart, a person who files as “single” and has an AGI between $21,251 and $32,500 may claim a tax credit that is equal to 10% of their retirement contribution. Therefore, Monica may claim a 10% Saver’s Credit—$200—for her $2,000 401(k) contribution.

6.  I think I’m eligible for the Saver’s Credit. How do I claim it?

To claim the credit, use tax Form 8880, “Credit for Qualified Retirement Savings Contributions.” If you have any questions about how to claim this credit, talk to your tax accountant.

Subhead: Betterment offers the support your employees need

As an employer, you can help your employees pursue their retirement goals—and Betterment can help. As a full-service plan provider, Betterment will do the heavy lifting for you from onboarding to ongoing administration. We’re also here for your employees every step of the way. Whether they’re wondering if they’re eligible for the Saver’s Credit or debating how to invest, we offer personalized advice to help them make smarter decisions. Plus, we do it all for a fraction of the cost of most providers.

See the true impact of our 401(k) plan

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