Spread the Word on the Saver’s Credit to Bolster Plan Participation
So your client has a retirement plan and she’s ready to provide information to her employees and encourage them to participate. Great! But you may want to remind her to include information about the saver’s credit in her communications. This little-known federal tax credit is generally available to lower income participants who contribute to employer-sponsored retirement plans and IRAs. Increasing awareness of the credit and its benefits will help motivate employees to jump-start their retirement saving, and as a result, bolster plan participation, which may help some plans pass nondiscrimination testing.
If your business model includes offering retirement plans for employers, you can serve as an information resource for improving plan participation, which can help cement relationships between those employers and your organization.
Raising awareness about the tax credit begins with understanding how the saver’s credit works. An individual may claim a portion of the annual contributions he makes to employer-sponsored retirement plans and to IRAs (rollover assets do not qualify) as a nonrefundable tax credit, subject to the following criteria.
The individual must be age 18 or older.
The individual must not be a full-time student.
The individual must not be claimed as a dependent on another person’s tax return.
If these criteria are satisfied, the amount of the credit then depends on the individual’s adjusted gross income and tax-filing status. The credit (which can’t exceed $1,000) may equal 10 percent, 20 percent, or 50 percent on contributions of up to $2,000, depending on the applicable adjusted gross income limits.
The saver’s credit can be taken for contributions made to the individual’s Traditional or Roth IRA; elective deferrals made to a savings incentive match plan for employees of small employers (SIMPLE) IRA plan, 401(k) plan, 403(b) plan, or governmental 457(b) plan; and after-tax contributions made to a qualified retirement plan or 403(b) plan. Beginning in 2018, the credit can also be taken for contributions made to an ABLE account if the individual is the designated beneficiary. The credit is claimed using IRS Form 8880, Credit for Qualified Retirement Savings Contributions, and is submitted along with the individual’s IRS Form 1040, U.S. Individual Income Tax Return (or similar return).
The individual should be careful about taking certain retirement account distributions if claiming the credit, because the credit may be reduced by withdrawals made during the testing period. Refer to IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for more information.
There are multiple ways for your client to increase awareness of the saver’s credit. One way might be to mention the credit within other communications she sends to employees. Another might be to discuss the credit during informational meetings about the plan. Whatever method your client chooses, spreading the word about the saver’s credit and encouraging employees to take advantage of it will ultimately help them; they benefit from increased retirement readiness—and they may get a bit of extra cash in their pocket.
