2 Tax Credits Retirement Savers Probably Don’t Know About

Advisors who serve younger clients especially should make sure they know about these

Advisors who are working with younger clients or those with lower income levels should talk with them to make sure the Retirement Savings Contributions Credit, or Saver’s Credit, is on their radar, according to Catherine Collinson, president of the Transamerica Center for Retirement Studies.

The IRS allows retirement savers to claim a percentage of their contributions to qualified retirement plans, including myRA plans, up to $2,000 (or $4,000 if they’re married and filing jointly). Rollover contributions aren’t included in calculating the amount of the credit.

The IRS has characterized the credit as for “low and moderate income savers,” which many have translated to mean “poor,” but Collinson called that a “misconception.”

“Income eligibility requirements for the Saver’s Credit are much broader than people may think,” she told ThinkAdvisor on Monday. “Just in terms of the income eligibility requirements alone, around half of all tax filers may be eligible.”

There are other limitations that bring the number of eligible filers down – they have to have some tax liability and they can take the credit only up to the amount of their tax bill, she said. Students and dependents are ineligible, as are minors.

Eligibility is based on tax filers’ adjusted gross income. Single filers who have an AGI of up to $30,750 in 2016 and $31,000 in 2017 are eligible for the credit. Limits for head of household filers are $46,125 in 2016 and $46,500 in 2017. Married joint filers have an income limit of $61,500 in 2016 or $62,000 in 2017.

The credit isn't available to filers who use the 1040EZ form, Collinson said. She recommended tadpayers interested in the credit use Form 1040, 1040A or 1040NR.

Using IRS data from 2014, Collinson estimates about 30 million Americans may be eligible for the credit. However, only about 7.9 million actually claimed it.

“Our research has found that about one in three workers say they’re aware of” the credit, Collinson said. Furthermore, among the people most likely to be eligible for the credit – women or part-time and low-income workers – just one in four are aware of it.

Advisors “more than likely […] have an idea of their clients' current level of income and may be able to discern right away” if they’re eligible, Collinson said. Even if their clients aren’t eligible, she added, it’s still worth discussing because the client may have adult children who are, but don’t know about the credit.

That could be helpful for advisors who are trying to grow their client base by engaging with millennials who are still growing their wealth.

Catch-up contributions are another important topic that advisors with younger clients should raise as they begin tax planning. Collinson said that although most boomers are aware of catch-up contributions, less than half of Gen X clients – who started turning 50 in 2015 -- can say the same.

“When catch-up contributions were introduced in 2001, the oldest Gen Xers were still in their early 30s. I guarantee they were not thinking about turning 50,” Collinson said. However, “it’s still a valuable opportunity to save on a tax-advantaged basis.”

The 2016 limit for catch-up contributions is $6,000 for participants in 403(b), 457(b) and most 401(k) plans. SIMPLE 401(k) and IRA participants can only contribute $3,000 in additional deferrals. IRA participants can contribute an additional $1,000.

Participants in some 403(b) plans may make additional contributions on top of the $6,000 catch-up for workers over age 50, if they’ve worked with the same employer for at least 15 years. Participants who qualify may have an elective deferral limit as high as $21,000 for 2016, according to the IRS.

--- Read How Investment-Only Annuities Can Help Clients Save on Taxes on ThinkAdvisor. 

Correction: This article has been updated to clarify which forms may be used to file for the Saver's Credit. 

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