For many low- to moderate-income Americans, the path to a comfortable retirement is fraught with challenges, particularly when it comes to saving and investing for the future. One underutilized resource that can aid in this endeavor is the retirement savings contributions credit, commonly referred to as the saver’s credit. This relatively obscure tax benefit is designed to encourage retirement savings by providing a tax reduction for eligible taxpayers who contribute to individual retirement accounts (IRAs), 401(k) plans, or other qualifying employer-sponsored plans. With potential savings of up to $1,000 for individuals and $2,000 for couples, it represents a valuable opportunity that remains largely overlooked.
Despite the potential advantages, awareness about the saver’s credit is surprisingly low. Recent surveys, including one conducted by the Transamerica Center for Retirement Studies, reveal that only about half of U.S. workers even know this credit exists. Alarmingly, that number falls to just 44% among households earning under $50,000 annually. This lack of awareness directly impacts the number of taxpayers who actually benefit from the credit: data shows that only about 5.8% of tax returns in 2022 claimed the saver’s credit, with filers receiving an average of $194 in benefits. Such statistics suggest that many potential beneficiaries are missing out on crucial financial support that could help bolster their retirement savings.
The saver’s credit operates with specific eligibility requirements that can complicate its use. The credit offers a tiered benefit structure based on adjusted gross income (AGI). For the 2024 tax year, individuals with an AGI of up to $23,000 are eligible for the maximum 50% credit on their retirement contributions, while couples filing jointly can earn this benefit with an AGI up to $46,000. As income rises above these thresholds, the percentage of the credit decreases incrementally, with a complete phase-out occurring at approximately $38,250 for individuals and $76,500 for married couples. With these income-specific stipulations, understanding eligibility can be difficult, contributing to the credit’s underutilization.
One of the primary reasons that the saver’s credit remains hidden from many taxpayers is its complex calculation method. Unlike straightforward tax deductions or credits, the saver’s credit contains several moving parts, including income phase-outs and filing status considerations. For many, especially those with limited financial literacy or access to tax assistance, navigating this process can be daunting. Experts suggest that this complexity may contribute significantly to the low participation rates in claiming the credit, as individuals may feel overwhelmed or uncertain about their eligibility.
In response to the persistent challenges surrounding the saver’s credit, legislative changes are on the horizon. The Secure 2.0 Act aims to simplify retirement savings for low- to moderate-income individuals by replacing the saver’s credit with a new initiative known as the “saver’s match.” Set to launch in 2027, this program will deposit funds directly into taxpayers’ retirement accounts, thereby streamlining the process and making it easier for individuals to receive assistance. This shift could potentially enhance participation rates and remove some of the barriers that deter eligible taxpayers from maximizing their retirement savings.
While the saver’s credit presents a potent opportunity for low- to moderate-income individuals to bolster their retirement savings, its complexity and the widespread lack of awareness hinder its effectiveness. It is crucial for taxpayers to educate themselves about available benefits and for policymakers to continue reforming the system in ways that enhance accessibility and effectiveness. The upcoming introduction of the saver’s match represents a promising step in this direction, but for many, immediate action to leverage the existing saver’s credit could yield significant benefits for their financial futures. Understanding these credits and staying informed can mean the difference between a modest retirement and a financially secure one.