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Some retirement savers may still qualify for an additional tax incentive for 2023. However, most eligible tax filers do not claim it, according to the IRS.
The Retirement Savings Contribution Credit, or “saver’s credit,” can help low- to moderate-income tax filers offset some of the funds added to an individual retirement account, 401(k) plan or another professional plan.
You can still make a 2023 contribution to an IRA before the April 15 filing deadline to “obtain a special tax credit,” according to the IRS.
How does saver credit work?
You can claim up to 50% of retirement contributions up to $2,000 for single filers or $4,000 for married couples filing jointly for maximum credits of $1,000 or $2,000, respectively.
The tax break provides a dollar-for-dollar reduction in taxes owed, which could lower your tax bill or increase your refund.
But there are income limits.
For 2023, your adjusted gross income cannot exceed $21,750 for singles or $43,500 for married couples for the 50% credit. The percentages drop to 20% and 10%, respectively, as income increases, with a complete phase-out above $36,500 for individuals or $73,000 for joint filers.
Still, if you qualify for the saver’s credit, you could benefit from several tax breaks for a last-minute deposit, including a possible deduction for pre-tax IRA contributions or tax-free future growth for deposits Roth IRA, explained tax chief Mark Steber. information manager at Jackson Hewitt.
Why few filers claim the saver’s credit
Despite the incentive, 5.7% of taxpayers claimed the Savers Credit for the 2021 tax year, according to IRS estimates. This low percentage can be explained by several reasons, according to experts.
Millions of low-income Americans have little or no tax liability, and the Saver’s Credit is non-refundable, meaning you can’t get the credit without paying taxes.
“If you have no significant tax liability, or even no tax liability, the value of the credit is extremely limited, if not potentially zero,” said Emerson Sprick, associate director of the economic policy program at the Bipartisan Policy Center.
If you have no significant tax liability, or even no tax liability, the value of the credit is extremely limited, or potentially zero.
Emerson Sprick
Associate Director of the Economic Policy Program at the Bipartisan Policy Center
Additionally, “most people don’t know this credit exists,” Sprick said.
In fact, less than half of American workers are unaware of saver’s credit, according to a recent survey by the Transamerica Center for Retirement Studies.
However, even if someone owes taxes and knows about the credit, they must have enough money to save, Sprick said.
In 2027, the Saver’s Credit is expected to be converted to a federal government Saver’s Match, which could address some of the current restrictions. But barriers to saving for retirement remain, experts say.
“The most effective way to get people into the retirement savings ecosystem is through employer-sponsored retirement plans” with automatic contributions, Sprick said.
Even though access has improved, many Americans still lack a workplace retirement plan.
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