Family Finances

The Saver’s Credit: A Case Study About a Little-Known Tax Credit That Pays to Save for Retirement

February 27, 2017  • Catherine Collinson

This guest blog is part of a series related to the Financial Security Program’s event, Should They Stay or Should They Go? Reexamining Retirement Tax Incentives.


It may sound too good to be true: a tax credit that can lower a taxpayer’s bill if he or she saves for retirement in a tax-favored retirement account. But yes, the IRS has a tax credit that pays people to save for retirement.

The Saver’s Credit, also referred to as the Retirement Savings Contributions Credit, is a tax credit above and beyond the tax-favored treatment of retirement accounts and is available to millions of Americans who meet certain income and eligibility requirements. The Saver’s Credit may be applied to the first $2,000 of voluntary contributions that an eligible worker makes to a 401(k), 403(b) or similar employer-sponsored retirement plan, or an IRA or MYRA. The maximum credit is $1,000 for single filers or individuals and $2,000 for married filing jointly (if each spouse contributes $2,000).

This double tax benefit should be a powerful savings incentive, yet is actually used by relatively few. In 2014, the most recent year in which IRS data is available, only 7.9 million tax filers claimed the credit – and at an average credit amount of $175.

An often cited reason for the low take-up rate is that the Saver’s Credit is not refundable, meaning that it can only be claimed if the tax filer has a tax liability. Even so, Transamerica Center for Retirement Studies (TCRS) estimates that approximately 30 million tax filers meeting the income requirements had a tax liability in 2014 and may have been eligible. (Note: the number of tax filers who are ineligible because they were under age 18, a full-time student, and/or could be claimed as a dependent on another’s return is not readily available and was not factored into the TCRS estimate.)

Promoting Awareness Could Increase Take-Up Rates

An important first step in evaluating the effectiveness of a tax incentive is gauging its level of public awareness. After all, how can people take advantage of something if they don’t know about it?

The Saver’s Credit is unknown to most workers. Just one in three are aware of the credit, according to TCRS’s 17th Annual Transamerica Retirement Survey. The survey also found that workers who are more likely to meet the Saver’s Credit’s income eligibility requirements are actually less likely than other workers to be aware of it. The survey found that only 25 percent of women workers, 26 percent of workers with a household income of less than $50,000, and 24 percent of those with a high school education or less are aware of the credit.

This lack of awareness undermines the Saver’s Credit effectiveness as a tax incentive in two ways:

First, many eligible workers may already be saving for retirement and are not claiming the credit, simply because they don’t know about it. Further, some may be unwittingly using the wrong tax form. The credit cannot be claimed on the Form 1040 EZ. Either the Form 1040A or Form 1040 must be used.

Second, among eligible workers who are not yet saving for retirement, knowing about the credit would be just the nudge that they need to get started.

Messaging Matters: “Low- and Moderate-Income” Label May Be Hurting Uptake

The Saver’s Credit has long been characterized by the IRS as being available to low- and moderate-income workers. While this technically may be accurate, using this language may be counter-productive.

Not long ago, in my personal quest to promote awareness of the Saver’s Credit, I had an “aha” moment. I was speaking with a blogger who was concerned that the Saver’s Credit wasn’t a good fit for his readership because he felt that “low- and moderate-income” meant poor. In response, I recited the income eligibility requirements – $30,750 in 2016 for single filers, $46,125 for head of household, and $61,500 for married filing jointly.

A long silence ensued before he said, “My readership does actually fall within that income range. Neither they nor I would self-identify with that description.” As a result of that conversation, TCRS now describes the credit as being available to eligible taxpayers in lieu of any income demographic references.

This problematic messaging may also inspire a reluctance among employers, who play such a critical role in encouraging retirement savings, in promoting the credit to their employees. In my opinion, one could reasonably hypothesize that employers may be uncomfortable promoting the availability of something for low- and moderate-income workers, as it may detract from employee perceptions of their own compensation.

A simple fine-tuning of the messaging could improve both awareness and take-up rates of the Saver’s Credit – while increasing employer involvement and retirement savings among workers.

Enhancing and Expanding the Saver’s Credit So More Americans Can Benefit

In addition to increasing awareness of the Saver’s Credit, there are some important opportunities for enhancing and expanding it so that more may be eligible and/or benefit including:

  • An ongoing educational campaign about the Saver’s Credit and how to claim it. The campaign should engage both employers and workers. It should also highlight related opportunities to facilitate savings including the new myRA, the ability to deposit a portion of one’s tax refund into an IRA or myRA, and the IRS’ FREE FILE PROGRAM;
  • Incorporating the Saver’s Credit on Form 1040EZ, thereby making it easier to claim;
  • Requiring that the proceeds of the Saver’s Credit be directly deposited into a retirement account;
  • Increasing the income requirements and simplifying the eligibility requirements (e.g., no longer exclude full-time students and those who could be claimed as a dependent on another’s return);
  • Simplifying and collapsing the current three credit rates (50 percent, 20 percent, and 10 percent) within the income requirements into a single credit rate of 50 percent; and,
  • Making the Saver’s Credit refundable so that all savers who meet the income and eligibility requirements can fully benefit.

One way that we all can help promote the Saver’s Credit and possibly increase retirement savings is through a grassroots effort by telling our families, friends, and colleagues about it. TCRS has created newsletter articles, fact sheets, and infographics – in English and Spanish – that are available and encouraged for public use and can be found on our SAVER’S CREDIT PAGE

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About Transamerica Center for Retirement Studies

Transamerica Center for Retirement Studies® (TCRS) is a division of Transamerica Institute®, a nonprofit, private foundation. The Transamerica Institute is funded by contributions from Transamerica Life Insurance Company and its affiliates and may receive funds from unaffiliated third parties. For more information about TCRS, please refer to www.transamericacenter.org and follow TCRS on Twitter at @TCRStudies.

About the 17th Annual Transamerica Retirement Survey

The online survey was conducted within the U.S. by Harris Poll on behalf of TCRS between April 11 and May 12, 2016 among a nationally representative sample of 4,161 full-time and part-time workers, including 2,315 women, 1,352 with household incomes less than $50,000 and 535 with a high school education or less. Potential respondents were targeted based on employment status and company size. Respondents met the following criteria: U.S. residents, age 18 or older, full-time or part-time workers in for-profit companies, and employer size of 10 or more. Results were weighted where necessary to bring them into line with the population of U.S. residents age 18+, employed full-time or part-time in for-profit companies with 10+ employees, and to adjust for attitudinal and behavioral differences between those who are online versus those who are not, those who join online panels versus those who do not, and those who responded to this survey versus those who did not. No estimates of theoretical sampling error can be calculated.

The views and opinions of the author are their own and do not necessarily reflect the view of the Aspen Institute Financial Security Program or our funders.

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