What is Saver's Credit?
Saver’s Credit is an important tax credit directly targeted at promoting qualified retirement savings to low- to middle-income Americans. Eligible households can build their nest eggs for their retirement with some help from federal government.
The Saver’s Credit was originally passed into law as part of the Economic Growth and Tax Relief Reconciliation Act of 2001—but with a sunset provision that would make it expire at the end of 2006. On August 17, 2006, President Bush signed the Pension Protection Act of 2006, and the Saver’s Credit was among the many important pension-related provisions of the Economic Growth and Tax Relief Reconciliation Act that were made permanent
Data from the IRS1 indicates that the Saver’s Credit was claimed on about five million tax returns, representing only about 4% of all tax returns filed each year between 2002 and 2005. With the relatively low rate of households claiming the credit, it seems that there may be a lack of awareness about the Saver’s Credit. Given the substantial participation rate in employer-sponsored retirement plans, such as 401(k) plans, many eligible individuals and households may be missing out on this tax credit. And those individuals and households who are not saving for retirement may be unaware that they could benefit from the Saver’s Credit if they do so.
Several possible sources of confusion around the Saver’s Credit exist, including:
- The 1040EZ form, the tax form commonly used by low-to-middle income taxpayers, does not provide for the Saver’s Credit. Forms 1040, 1040A, or 1040NR—along with Form 8880—must be used.
- The IRS uses the term “Retirement Savings Contributions Credit” (versus Saver’s Credit) in its publications.
- The Saver’s Credit is non refundable and may only be applied towards the federal income taxes owed in a given year. If an individual or household has no tax liability, then the Saver’s Credit would not be treated by the IRS as a refund.
- Taxpayers who prepare their taxes manually versus using tax preparation software or a professional tax preparer may find claiming the Saver’s Credit to be complicated.