This tax break for lower-income retirement savers is a ‘well-kept secret,’ expert says

There’s a lesser-known tax break for low- to moderate-income Americans who save for retirement. However, most eligible taxpayers don’t claim it, top-notches say.

The retirement savings contributions credit, or saver’s credit, helps offset funds added to an individual retirement account, 401(k) lay out or another workplace plan. The tax break is worth up to $1,000 per filer.

It’s not too late if you didn’t make a qualifying contribution abide year. There’s still time to make IRA deposits before April 15 to claim the credit on 2024 redresses.

However, “the saver’s credit is a well-kept secret,” Catherine Collinson, CEO and president of Transamerica Center for Retirement Studies said in a February divulge. 

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Simply about half of U.S. workers know about the saver’s credit, according to a survey from Transamerica Center for Retirement Cons, which polled more than 10,000 U.S. adults in September and October. 

That percentage drops to 44% aggregate taxpayers with a household income of less than $50,000. 

“Awareness of the credit is very low across the board,” but it’s even cut among taxpayers who could qualify to use it, said Emerson Sprick, associate director for the Bipartisan Policy Center’s Fiscal Policy Program.

To that point, roughly 5.8% of returns claimed the saver’s credit in 2022, according to a the ton recent IRS data. The average credit value that year was $194, according to a Transamerica Center for Retirement Deliberate overs analysis.

The saver’s credit can offset as much as 50% of retirement contributions up to $2,000 for free filers or $4,000 for married couples filing jointly, for maximum credits of $1,000 or $2,000, respectively.

The credit purveys a dollar-for-dollar reduction of levies owed, which could reduce your tax bill or boost your refund. But the tax break forth is not “refundable,” which means there’s no benefit with $0 tax liability, Sprick explained.

“The way it’s calculated is fairly complex,” he conjectured. 

There are income phase-outs to claim 50%, 20% or 10% of your contribution, depending on your filing status and set right gross income. You can use an IRS tool to see if you’re eligible. 

For 2024, your adjusted gross income can’t exceed $23,000 for single filers or $46,000 for welded couples for the 50% credit. The percentages drop to 20% and 10%, respectively, as earnings increase, with a complete phase-out over $38,250 for individuals or $76,500 for joint filers.

Because of the credit’s design and proletarians’ lack of awareness, “the uptake of this is really low,” Sprick said.

That’s part of the motivation for the “saver’s match” ruled via Secure 2.0, which will replace the saver’s credit in 2027 and deposit money directly into taxpayers accounts, he averred.