Why The Saver’s Credit Matters
I have long said personal finance is equal parts numerical and emotional. But, for those with lower incomes, saving for retirement requires more than emotional and numerical discipline; it also requires surplus money to stock away!
In the United States, the Census Bureau estimated that the median married couple had a joint gross income of $110,800 in 2022. That figure dropped to $56,030 and $73,630 for female and male households without spouses.
That is why I wanted to share a strategy that empowers many below the various median income levels in the US to save through a tax incentive program, regardless of whether they choose to defer money into traditional or Roth-type retirement accounts!
The Saver’s Credit (i.e., the Retirement Savings Contribution Credit)
Dating back twenty-plus years but remaining relatively unknown, the Retirement Savings Contribution Credit is a government incentive program that acts as a tax credit and can decrease taxes for individuals and couples earning below certain income eligibility limits.
The program works by providing a 10%, 20%, or 50% tax rebate to lower-income individuals or couples on the first $2,000 or $4,000 they contribute to retirement accounts. Eligible accounts include the traditional IRA, Roth IRA, 401(k), 403(b), 457(b), federal Thrift Savings Plan, and, more obscurely, the 501(c)(18)(D) pension plan. Notably, contributions to ABLE plans count towards the credit if the contributor is also the designated beneficiary (i.e., you are the person who contributes and withdraws from the account).
To qualify for the Saver’s Credit, an individual/head of household/couple may earn up to the following adjusted gross income (AGI) limits in the image below. (AGI equals gross income minus certain adjustments to income, such as IRA contributions. A tax rebate is a credit applied to your overall tax burden for the year, while a tax deduction reduces what portion of your income is subject to taxes. Put another way, a tax credit acts like a payment you make to the government for what you owe, while a deduction lowers your overall burden amount.)
Because the Saver’s Credit is a non-refundable tax rebate, an individual or couple must owe taxes to benefit from it since they cannot receive a refund or reduce their taxable burden if they don’t owe taxes.
Examples of Credit
Ellis files as single while earning an AGI of $23,000 annually. If Ellis contributes $2,000 to their workplace 401(k) plan, they will receive a tax credit of up to $400 (assuming their tax liability after claiming other deductions remains at or above $400).
Robin files as head of household and has one dependent with an AGI of $30,000. If Robin contributes $2,000 to their Roth IRA, they will receive a tax credit of up to $1,000 (assuming their tax liability after claiming other deductions remains at or above $1,000).
Ash and Kai are married, file jointly, do not have workplace retirement accounts, and have a combined gross income of $86,000. Suppose they each contribute $6,500 to their traditional IRAs ($13,000 total). In that case, their AGI drops to $73,000, qualifying them for the 10% rebate on their contributions up to $4,000 combined, which is $400.
Additionally, recipients of the Saver’s Credit must be at least eighteen years of age, not be claimed on someone else’s tax return as a dependent, and not be a full-time student or have been one in the past five months.
Examples of schools or programs that count as schooling include colleges, universities, technical/trade/mechanical schools, and on-farm training programs run by public agencies or private schools. Notably, internet-only institutions are exempt from the student status.
How to Claim the Saver’s Credit
If someone meets the income qualifications and other requirements for the Saver’s Credit, they must contribute to their retirement account by the deadline for that tax year. The deadline for 401(k) and 403(b) plans is December 31st of each year, while for IRAs, the deadline is usually April 15th of the following year.
For example, if I want to claim the 2023 credit using contributions to a 401(k) plan, I must contribute by 12/31/2023. Meanwhile, if I want to claim the 2023 credit using contributions to an IRA, I have until 4/15/2024.
Once an individual or couple has met all qualifications/requirements, they must complete and file Form 8880, Credit for Qualified Retirement Savings Contributions, with their tax return. Then, they will receive a refund check/direct deposit or owe less taxes if they have an outstanding tax bill.
Future Changes Have Benefits and Drawbacks
Under the SECURE Act 2.0, the Saver’s Credit program will transform in 2027 to the Saver’s Match. The changes to the program have benefits and drawbacks for those who are currently eligible.
As a word of caution, please be advised that since the Saver’s Match program has yet to go into effect, future changes could occur, and details could change. With that said, here are some highlights of significant changes:
First and foremost, the transition in 2027 will transform the current tax credit program that gives eligible savers a tax rebate into one where the government instead deposits a matching contribution into eligible (i.e., non-Roth) retirement accounts, such as IRAs, 401(k)s, and 403(b)s.
With the new changes, all eligible persons will receive a 50% match based on the first $2,000 they contribute, up to $1,000. Unlike the current Saver’s Match program, recipients will still receive the full match even if their tax burden (i.e., the amount they owe) is less than $1,000. However, the amount of match receivable will decrease if the recipient is in the new AGI phase-out range, turning to zero if they exceed the limit. Those eligible for the Saver’s Match but receiving less than $100 under the 2027 program can elect to receive the benefit as a tax credit instead of a mandatory savings match.
While I have seen conflicting information online, my research found that the new AGI ranges and limits are less than the existing ones, which will reduce the number of people eligible for the Saver’s Match program. However, these ranges and limits will automatically increase to account for inflation starting in 2028.
When the transition begins in 2027, ABLE accounts will lose their eligibility status for the new Saver’s Match program. This change means that those with disabilities currently participating in the Saver’s Credit program will lose their benefits unless they defer money solely into a retirement account.
It is essential to recognize that those with disabilities and who meet the ABLE and Saver’s Credit/Match guidelines have lower incomes and disabilities that make life more difficult for them. Forcing these individuals to save in a retirement account now versus having a choice of where to save previously is unfortunate at best. Still, some positive changes for ABLE accounts are coming, such as the cutoff age for eligibility changing from 26 to 46 in 2026.
The Saver’s Credit is a generous program for those with lower incomes to increase the impact of their limited dollars’ when it comes to saving. However, the biggest hindrance to the program is the lack of knowledge surrounding it.
When the Saver’s Match program eclipses the Saver’s Credit in 2027, the government will be required to promote the new program better, hopefully causing an uptick in enrollment. While this upcoming change is appreciated, the transition has benefits and drawbacks.
Some changes to the Saver’s Credit/Saver’s Match program will help Americans save for retirement faster. In contrast, other changes will reduce eligibility and flexibility for those participating, which is unfortunate.
What has your experience been with the Saver’s Credit program? Have you ever participated in it? What do you think about the changes under the new Saver’s Match program? Please let me know in the comments below, and as always, have a great day!