Uncle Sam Gives Tax Credits for Retirement Saving

Mary Brunson and Robert Toth, JR
Monday, March 21, 2016

By: Mary Brunson, AIF®, Vice President of Investing for Catholics and Robert J. Toth, JR., JD, Of Counsel, Retirement Law Group

Most people know that saving for retirement is important. Unfortunately, knowing the importance of saving does not always translate into action. For many, the pressure of meeting the expenses of daily life supersedes the ability to squirrel away money for a time seemingly so distant in the future.

There are a few inducements that make retirement savings easier and more enticing than at first blush. Some employers provide employer-sponsored matching programs to encourage saving, with both employer and employee kicking in a little. Matching programs can quickly turn a little savings into a respectable nest egg that can grow over time. Others may provide an employer contributory plan, and offer a voluntary plan as a supplement to encourage savings to meet income needs in retirement. Even knowing this, some folks still struggle to find the extra cash to save.

It turns out extra savings dollars may be readily available to employees courtesy of Uncle Sam. Eligible employees may be able to take advantage of a little known tax credit that can increase the annual tax refund or be used to lower paycheck tax withholdings with those dollars being shifted into the retirement plan.

Not a New Credit
Congress adopted this tax credit program, called the Savers Credit, in 2002, but many employers and employees of churches and other tax exempt organizations are still not aware of it. It is surprising that it is under-used. The credit effectively offsets a portion of the contributions an employee makes to a 403(b) or 401(k) plan in any given year by increasing that employee’s tax refund or reducing the amount of tax the employee owes. The current maximum credit is $1,000 for an individual or $2,000 for a married couple. This is excellent news for those struggling to make contributions.

The key to receiving the credit is for the employee to first elect to make a contribution to their 403(b) or 401(k) plan, and then filing a special form with the IRS each tax year—IRS Form 8880. Though there are certain eligibility requirements that need to be met, such as income ceilings,* it is certainly worth looking into, and to make sure employers and employees alike understand this valuable benefit as it could really make a difference in their ability to save.

The chart below provides more detail:

  Provisions
Description
  • Since 2002, Tax Saver’s Credit helps offset part of first $2,000 voluntarily contributed by the end of tax year to a 403(b) plan. Saver’s credit can increase taxpayer’s refund or reduce tax owed.
Eligibility
  • Married couples filing jointly with incomes up to $61,000 in 2015;
  • Heads of Household with incomes up to $45,750 in 2015; and
  • Married individuals filing separately and singles with incomes up to $30,500 in 2015.
Maximum Credit
  • Based on income and filing status, 10%, 20% or 50% of eligible voluntary savings contributions can be received.
  • Maximum saver’s credit is $1,000 
  • Maximum increases to $2,000 for married couple
Limitations
  • Taxpayer’s credit based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs 
  • Due to impact of other deductions and credits, credit may be less than maximum and may be zero for some taxpayers
Required Tax Form
  • IRS Form 8880 used to claim saver’s credit
Additional Rules
  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as dependent on someone else’s return cannot take credit.
  • Student cannot take credit. A person enrolled as full-time student during any part of 5 calendar months during year is considered a student.
  • Certain retirement plan distributions reduce contribution amount used to figure credit.
  • See instructions for IRS Form 8880 for complete rules

 

Tax Credit Makes Auto Enrollment Easier
Studies continue to show the important role that automatic enrollment in 403(b) and 401(k) plans plays in an employees preparation for retirement. However, many Church plan sponsors may hesitate to implement these programs because it may also impose a measure of hardship on certain employees. The Savers Credit can help address that concern. By adopting automatic enrollment programs in connection with efforts to facilitate the employee’s use of the Saver’s Credit (such as providing employees the right tax form with instructions on how to file it), while educating the employees of its value, church-run organizations can take a large step in promoting a secure retirement for their employees. Managed effectively, the credit has the potential to offset a large portion of the employee’s contribution, and help employees save for retirement.

Automatic enrollment in 403(b) and 401(k) is a feature that is just now becoming widely available to churches because of a new law change. It has been quite popular in retirement plans of for-profit companies in the past few years, enabled by the Pension Protection Act of 2009. That Act enabled employers to widely enroll their employees in the plan, deferring a certain percentage of their salary into to their retirement account with the right to opt out at any time. Technicalities associated with non-ERISA 403(b) and 401(k) plans (like church plans), however, made automatic enrollment non-permissible in most states. Congress has fixed that technical problem, and church plans are now able to auto-enroll their employees in their plans. If effectively communicated, this development has the ability to significantly enhance retirement readiness for church employees.

If you would like to learn how to help your participants effectively prepare for retirement, visit investingforcatholics.com, email mary@ifa.com, or call 888-815-5025.



*Important Note: The information included herein is intended for educational purposes only, and for use by institutional retirement plan sponsors. IFC is not a tax advice expert, nor is this article intended to be a complete explanation of the process for receiving a tax deduction or credit. Please consult with your tax advisor or third-party plan administrator for a complete explanation, or to address your specific situation.