A lesser-known retirement savings incentive may make it easier for some Americans to set aside more money, and there’s still time to qualify for 2021.
The write-off, known as the retirement savings contribution credit or saver’s credit, rewards low- and moderate-income filers at tax time for adding to their nest egg.
While the tax break has been around for years, it’s not widely known or well-communicated to the public, said certified financial planner Jamie Rugg, vice president at Highline Wealth Partners in Sherman Oaks, California.
You can claim up to 50% of retirement contributions for a maximum credit of $1,000 for single filers and married couples filing together may receive $2,000.
“Tax credits are much more valuable than deductions,” Rugg said, explaining how the write-off can reduce your liability.
For 2021, you may qualify for 50% with an adjusted gross income of $19,750 or less and couples filing jointly can make up to $39,500. The percentages drop to 20% and 10% as income rises and phases out entirely over $33,000 ($66,000 if you’re married filing together).
There’s still time to make deposits for 2021 by contributing to an existing individual retirement account by April 18, 2022, the tax filing deadline for most states.
“Just make sure the bank or custodian processing your contribution marks it for 2021, not 2022,” Rugg added.
However, the saver’s credit is non-refundable, meaning it may only reduce or eliminate levies owed, making it difficult to claim for those with little to no tax liability, which is common among low-income filers.
“Right now, the system does not give everybody equal incentives to save,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center.
In 2020, 33% of private industry employees didn’t have access to workplace retirement plans, according to the Bureau of Labor Statistics, and those working part-time were less likely to have company-provided accounts.
While many workers qualify for an IRA, low-income Americans are less likely to have an account, a Tax Policy Center analysis shows.
And it may be difficult for some lower earners to afford the contributions needed to qualify for the saver’s credit, explained John Power, a Walpole, Massachusetts-based CFP with Power Plans.
The House Ways and Means Committee in September approved a Build Back Better provision to expand the saver’s credit by making it refundable up to $500, meaning someone may benefit even without tax liability.
If approved, savers would have received this matching payment as a deposit in their retirement account, which is different from the current law. However, these changes didn’t make it into the final version of the bill.
