Retirement savers whose income took a hit during the pandemic may be able to get money to keep on saving thanks to a little-known tax credit.
The Saver’s Credit gives people up to $1,000 to save in 401(k)s and individual retirement accounts if their income is low enough, but few people know about it or use it because of a tricky combination of qualifications. To claim the credit a person must not only have scant income, but also owe some taxes while having cash to save for retirement.
Given the income limits—no higher than $32,500 for singles or $65,000 for couples for 2020—few financial planners think of the Saver’s Credit because their clients often are more affluent. Financial advisors who are aware of it tend to use it for new retirees with a sharp drop in income after leaving jobs or new college graduates just starting careers.
But the 2020 tax year could be different for people who lost jobs and income from businesses during lockdowns meant to slow the spread of Covid-19.
Jerry Love, a certified public accountant in Abilene, Texas, helped a client in his 20s stash $2,000 for retirement using the Saver’s Credit. With only about $19,500 in income from a life-coaching business, his client put $2,000 into an IRA. Under Saver’s Credit rules, that’s the maximum amount that is eligible for a credit of 50%, or $1,000.
But while Love wanted the man to save as much as possible and recommended a $2,000 contribution, he knew the credit wouldn’t be as generous as $1,000. That’s because the Saver’s Credit is nonrefundable, which means the government won’t give a person any more than they would owe in taxes. And since the man owed only $510 in taxes, that capped his credit.
Still, the credit wiped out all of his taxes. So he has started to build up savings for retirement using $510 that otherwise would have belonged to the government. And instead of having to take $2,000 out of pocket to fund his $2,000 IRA, he only needed $1,490.
“This is a great benefit for those who can get it,” Love said. “I’m trying to convince [young clients] to save as much as possible for retirement as early as possible,” and the Saver’s Credit adds an extra inducement for those with low incomes.
To qualify for the Saver’s Credit, people must have earned income from a job or business, be at least 18, and be independent of their parents. Full-time college students aren’t eligible for the credit.
A maximum credit of $1,000 is allowed on up to $2,000 whether it has gone into an IRA started at tax time or a 401(k)-type workplace retirement plan funded during the tax year. Couples can apply the credit to as much as $4,000 in an IRA or 401(k). (Actual contributions can go higher, though the credit would apply only to the $2,000.)
The top income level for the full 50% credit is $19,500 in adjustable gross income for singles and $39,000 for couples. For singles with incomes up to $21,250 and couples with income up to $42,500, the credit drops to 20%. The credit goes down to 10% after those thresholds, and it is no longer available once singles have over $32,500 and couples $65,000.
When people find their incomes slightly above the levels allowed, however, they can sometimes be eligible anyway by opening a tax-deductible IRA. Anything contributed to a deductible IRA—but not a Roth IRA—lowers taxable income. So a person with $21,500 in income might be eligible for the full 50% credit by putting $2,000 into a deductible IRA.
Retirees who are still working may be positioned to bolster their retirement savings with the Saver’s Credit, particularly those who have part-time jobs while waiting to tap retirement accounts or Social Security.
Cassandra Kirby, a financial advisor at Braun-Bostich & Associates in Pittsburgh, applied the Saver’s Credit to that type of semi-retired couple. At 69 years old, the wife had about $7,200 in take-home income from her job as an aerobics instructor and she put $6,500 of it into a Roth IRA. Her 68-year-old husband was fully retired and living primarily on Social Security. So with only $45,000 in adjustable gross income, their income was low enough to qualify for $200 from the Saver’s Credit. That was 10% of the $2,000 the woman had put into her $6,500 Roth IRA.
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