75 percent of eligible households ignore this retirement tax credit

Karla Bowsher

In less than six months, it will be income-tax season again. And as in years past, millions of taxpayers likely will miss the opportunity to slash their tax bill by up to $2,000 simply because they overlook a little-known federal tax break.

According to the Internal Revenue Service, the Saver’s Credit is worth 10 percent, 20 percent or even 50 percent of your retirement plan contributions up to $2,000 (or $4,000 for married people filing joint tax returns).

And yet, just 25 percent of workers in households that earn less than $50,000 are even aware of this credit, according to a survey by the Transamerica Center for Retirement Studies.

Your eligibility for the credit — and the size of the break you will receive — depends largely on your income and tax filing status, however. To be eligible for the Saver’s Credit, you must:

  • Be an adult who is not a full-time student and not claimed as a dependent on someone else’s tax return.

  • Have an adjusted gross income of no more than $31,500 (or $63,000 for married people filing jointly; or $47,250 for people filing as heads of household).

  • Contribute to a certain type of retirement plan (see below).

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The percentage of your retirement contributions eligible for the Saver’s Credit also depends on your income. Click the IRS link above for a breakdown.

Contributions to various types of retirement plans are eligible for the Saver’s Credit:

  • Traditional IRA

  • Roth IRA

  • 401(k)

  • SIMPLE IRA

  • SARSEP

  • 403(b)

  • 501(c)(18)

  • Governmental 457(b) plan

Failing to take advantage of such tax breaks is No. 1 among the “5 Blunders You’re Making When Investing for Retirement.” As we explain:

Putting your retirement money in a nonretirement bank account, CD or brokerage account isn’t going to cut it. These options all share a glaring weakness: They offer no tax advantages to the saver.

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7 Tips for Stress-Free Retirement Plan Investing

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