For many low- to moderate-income Americans, the journey toward retirement can be overshadowed by financial challenges. One invaluable resource that remains underutilized is the retirement savings contributions credit, more commonly known as the saver’s credit. Designed to incentivize individuals to save for retirement, this tax break is available to those who contribute to individual retirement accounts (IRAs), 401(k) plans, or similar workplace savings plans. Unfortunately, many who qualify for this credit are either unaware of its existence or fail to take full advantage of it, thereby missing out on an opportunity to enhance their financial stability in retirement.
The saver’s credit can provide taxpayers with a substantial benefit—up to $1,000 for individuals and $2,000 for married couples filing jointly—making it a powerful tool for those who qualify. Yet, research indicates that only a fraction of eligible taxpayers actually claim it, often due to a lack of understanding or knowledge about the program.
Recent findings from a survey conducted by the Transamerica Center for Retirement Studies reveal that out of over 10,000 adult respondents, approximately half are aware of the saver’s credit. This figure is alarmingly low, especially considering that the number drops to 44% for households earning less than $50,000 annually. According to Emerson Sprick, associate director for the Bipartisan Policy Center’s Economic Policy Program, the overall awareness of the saver’s credit is dismally low, particularly among the very individuals most likely to benefit from it.
Data from the IRS reveals a striking statistic: only 5.8% of tax returns submitted in 2022 claimed the saver’s credit. This suggests a significant disconnect between the existence of the credit and taxpayers’ knowledge of it. The average credit claimed was $194, a modest amount that nevertheless reflects lost opportunities for many individuals and families striving to secure their financial future.
The mechanics of how the saver’s credit is calculated can be daunting, which may contribute to its low uptake. The credit allows individuals to receive a percentage of their retirement contributions as a tax benefit, with structures in place to determine the credit’s value based on adjusted gross income (AGI).
For the 2024 tax year, the thresholds for claiming the highest percentage—50%—are set at an AGI of $23,000 for single filers and $46,000 for married couples. As income levels increase, the percentage of credit available diminishes, phasing out entirely at AGIs of $38,250 for individuals and $76,500 for joint filers. Additionally, the non-refundable nature of the credit means that individuals with no tax liability cannot benefit from it, further complicating its appeal.
Recognizing the shortcomings of the current saver’s credit, legislative changes are on the horizon. The Secure 2.0 Act introduces the “saver’s match,” a new initiative aimed at simplifying the saving process for low-income earners. Starting in 2027, this program will replace the current saver’s credit and will directly deposit funds into taxpayers’ accounts based on their retirement contributions, effectively removing the barriers of awareness and understanding that currently limit participation.
The transition to a saver’s match is hopeful, signaling a better future where individuals can easily receive financial support in their retirement saving efforts. It reflects a growing recognition of the need for more user-friendly and accessible retirement savings options.
The saver’s credit, while a well-intentioned program for enhancing retirement preparedness among low- to moderate-income individuals, has not achieved its potential due to low awareness and understanding. Efforts to promote awareness must be intensified to ensure that taxpayers are informed and empowered to take advantage of available resources.
Additionally, the impending transition to the saver’s match represents a critical shift in policy aimed at facilitating retirement savings and improving financial literacy. As the landscape evolves, the hope is that these measures will not only educate individuals but also encourage a culture of saving that ultimately enhances financial security for future generations.