Struggling With Retirement Savings? Uncle Sam May Give You Extra Credit

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Dear Carrie: I work for a small nonprofit. I love my job but don’t make a lot of money, so saving for retirement is hard. The company offers a retirement plan that I contribute to, but there’s no match. How can I save more?—A Reader

Dear Readers: This is a great question—and a great time to be asking it. With the challenges of the past year still fresh and people struggling to get back to some sort of normal, saving money is on everybody’s mind, whether it’s for planned expenses, an emergency fund, retirement, or all of the above. On the positive side, Americans on average have been saving more, with personal savings rates the highest they’ve been in years. However, for a lot of folks, saving—especially for retirement—is an ongoing challenge.

So, I’m happy your question gives me the chance to talk about a benefit from Uncle Sam that few people are aware of: the Saver’s Credit—a special tax break for low- to moderate-income taxpayers who are specifically saving for retirement. And with April 15 just ahead, there’s still time to take advantage of it for this tax year. Here’s how it works.

What It Does

The Saver’s Credit gives you a tax credit of 50 percent, 20 percent, or 10 percent on the first $2,000 in contributions you make to a retirement account. The percentage you get depends on your adjusted gross income (AGI) and filing status, but you could potentially claim a credit of up to $1,000—or up to $2,000 if you file jointly with your spouse. You might think of it as a retirement match from the government.

The Saver’s Credit is applied directly to your tax bill to reduce the amount of income tax you owe. For instance, if your tax bill is $1,000 and your credit is $400, you’d only owe $600. If your tax bill is $1,000 and your credit is $1,000, it’s a wash. You’d owe nothing.

What if your tax bill is $500 and your credit is $1,000? Unfortunately, you’d only get the $500 applied to your bill. The Saver’s Credit is nonrefundable, meaning if your credit is larger than your bill, you don’t get the difference.

How You Qualify

To meet the AGI requirements and qualify, you must be 18 or older, not a full-time student, and not claimed as a dependent on someone else’s tax return. (AGI is your gross income minus adjustments such as deductible retirement contributions, self-employment taxes, educator expenses, and student loan interest.)

To qualify for a 50 percent credit when filing your taxes for 2020, a single filer’s AGI can’t be more than $19,500. The AGI limit for a 20 percent credit is $21,250. For a 10 percent credit, it’s $32,500. The AGI limits for married filing jointly are $39,000, $42,500, and $65,000, respectively. These income limits are due to go up in 2021.

Of course, the final qualification is that you make a contribution to a retirement account. It’s important to note that rollover contributions don’t qualify for the credit and eligible contributions may be reduced by recent retirement account distributions. There’s lots of flexibility here because a wide range of retirement accounts are included: traditional and Roth IRA, traditional and Roth 401(k), 403(b), 457 plan, SIMPLE and SEP IRAs, and TSP (thrift savings plan) and ABLE accounts.

Let’s say you’re single, your income is $21,250, and you contributed $1,200 to your company retirement plan. You could claim a 20 percent tax credit of $240.

Now let’s say you file jointly with your spouse, your combined AGI is $39,000, and you each put $1,000 (a total of $2,000) into an IRA. You’d both be able to claim a 50 percent tax credit for a total of $1,000.

When to Claim It

First, be sure to make any 2020 IRA contributions by April 15, 2021. Then, you may be able to claim the Saver’s Credit when you file your regular income taxes. (The deadline for making 2020 contributions to other types of accounts eligible for the Saver’s Credit mentioned above was Dec. 31, 2020.) You’ll need to file IRS form 8880, which will ask for your AGI.

And remember, a retirement contribution may be tax-deductible, which can lower your AGI. So you could potentially get the benefit of the tax deduction for your contribution as well as the tax credit. It’s kind of a double reward for saving. If you need help determining whether you qualify for the Saver’s Credit, check out the IRS Interactive Tax Assistant. If you need more help with tax preparation, you may also qualify for free tax assistance from the IRS Volunteer Income Tax Assistance (VITA) program.

Other Ways to Boost Your Savings

The Saver’s Credit can be a welcome extra if you qualify, but even if you don’t, there are other ways to give your savings a boost. First, make sure that saving is included in your budget. Then, set up automatic monthly transfers from your checking account to a savings account to make it easy. Think of it as paying yourself first.

If you have a company retirement plan, make sure you contribute enough to get any match. Upping your contribution by even a small percentage will increase your savings in the long run. No company plan? Stay-at-home spouse? You and your spouse may still be able to open an IRA and start making regular contributions. Also, look into a Health Savings Account (HSA) if you have a high-deductible health plan. This is a great way to plan ahead for medical expenses, supplement retirement savings—and save on taxes.

Finally, whenever you get a windfall—a raise, a bonus, a tax refund, even a gift—consider putting some of it in savings. The amounts you save may seem small at first, but don’t get discouraged. They will add up over time. Then, take the next step and invest your savings to help it potentially grow faster.

With both saving and investing, time and consistency are two key factors in achieving your goals. Stick with it!

Carrie Schwab-Pomerantz, a certified financial planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.”