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Saver's Tax: An Incentive to Save for Retirement

Saver's Tax: An Incentive to Save for Retirement

Many people struggle to find the funds they need to build up their retirement savings. Fortunately, a non-refundable tax credit, called a retirement savings contribution credit, can make saving a lot easier. Often called a saver's credit, it allows qualified individuals to benefit from tax incentives in addition to the tax deductions they may receive on contributions to their IRAs or employer plans. By reducing tax debt, the loan offsets the cost of funding a retirement account and ultimately boosts savings potential.


Key Points to Note 

  • Saver's credit is available to qualified taxpayers who contribute to an employer-sponsored retirement plan or a traditional IRA or Roth.

  • The saver's credit is not available to people under 18, full-time students, or any person declared to be dependent on another taxpayer.

  • The credit value is determined by several factors, such as a person's contributions to the pension plan, the state of the process, and adjusted gross income (AGI).


What is the Saver's Credit?

The Savings Tax Credit is a non-refundable tax credit available to eligible taxpayers who deferred contributions to 401 (k), 403 (b), SEP, SIMPLE, or 457 employer plans. It is also available for those who contribute to Traditional and/or Roth IRAs. Since 2018, those who have contributed to tax-based savings accounts for people with disabilities and their families (called ABLE accounts) are eligible for saver's credit.

Depending on income levels, the credit is worth 10%, 20%, or 50% of a person's eligible contribution, but there are defined limits. The maximum credit allowed for HoH is $ 2,000, while couples filing jointly can claim up to $ 4,000. Repayable credits and adoption loans are not included in the equation.


Who is Eligible for a Saver's Credit?

To be eligible for a saver's credit, a person must be at least 18 years of age at the end of the appropriate tax year. They cannot enroll as a full-time student and cannot be declared dependent on another taxpayer's file. Finally, a person's adjusted gross income (AGI) must not exceed the following limits: 

2021

Credit Rate

Married and Files a Joint Return

Files as Head of Household

Other Filers

0%

More than $66,000

More than $49,500

More than $33,000

10%

$42,001 – $66,000

$32,251– $49,500

$21,501 – $33,000

20%

$39,501 – $42,000

$29,626 – $32,250

$19,751– $21,500

50%

Up to $39,500

Up to $29,625

Up to $19,750

  

As the table illustrates, the lower a person's AGI, the higher the saver's credit.

For example, John, whose order is unique, has an adjusted gross income of $ 19,200 for fiscal 2021. He contributes $800 to his employer-sponsored 401 (k) plan, plus $ 600 to his traditional IRA. Therefore, John is entitled to a non-refundable tax credit of $ 700 [($ 800 + $ 600 = $ 1,400) x 50%].


The Effect of the Saver's Credit

Claiming a credit by contributing to a pension plan can reduce a person's tax burden in two ways. First, the contribution to the plan itself is considered a tax deduction. Second, the saver's credit reduces the taxes owed, dollar for dollar.

Consider the following example. John, a married retail worker, earned $ 38,000 in 2020. That year, he contributed $ 1,000 to the IRA, while his unemployed wife did not generate income. After deducting his IRA contribution, the adjusted gross income shown on his joint return is $ 37,000. If this is the case, John is entitled to claim a credit of $ 500 at 50% for this contribution to the IRA.


When Are Pension Savings Not Allowed?

Any amount paid into a pension account that exceeds the allowable limit must be withdrawn from the account within a specified period. The returned part of the contribution does not qualify for the saver's credit. Additionally, if a person changes jobs and then transfers money from one retirement account to another, for example, from an employer-sponsored 401 (k) plan to a traditional IRA, that contribution is not eligible for the saver credit.


Bottom Line

The saver's credit can increase a person's saving power. Those who qualify for this credit and don't take advantage of this opportunity are wasting an easy way to add significant value to their savings.


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