Most Qualifying Taxpayers Fail to Take Retirement Saver’s Credit

Why such a low participation rate? Collinson says there is plenty of blame to go around, but it basically boiled down to lack of continual promotion, and then the impact of the recession.

“Everyone involved—the financial services industry, policy makers, the IRS, tax preparers—can do a much better job of promoting it then they are,” Collinson said.

“When it first came out and it was legislated in 2001 there was a lot of fanfare around it, and then the media cycle moved on to the next big thing,” Collinson said. “And then with the Pension Protection Act, which was legislated in 2006, there was a lot of fanfare and promotion was reinvigorated. Then the economy fell into the recession and employers and workers both were very focused on making ends meet.”

But there is another factor that boils down to which tax return form a taxpayer uses when they submit their taxes. Choose the wrong form, and the Saver’s Credit doesn’t appear as an option.

“The Saver’s Credit is not available on Form 1040EZ,” Collinson said. If you are eligible to claim the Saver’s Credit, you should use the Form 1040, Form 1040A or Form 1040NR.”

Retirement Planners Can Increase Public Awareness

Retirement planners and financial advisors should all be aware of the Saver’s Credit, Collinson explains, and they should promote its use. And even if an individual client may not quality, a couple might.

“Often tax preparers and retirement planners may work with individuals who have means being greater than low to moderate income. However, if you look at a married couple filing jointly, it’s conceivable that they may be eligible,” Collinson said. “It is also important that, even if their client isn’t eligible they may have family, friends or loved ones who might be, and they can play an invaluable role in spreading the word to increase awareness.”

So how much is the typical qualifying taxpayer losing out by not taking the Saver’s Credit. It various according to two primary criteria: income and amount saved toward retirement that year.

“The credit calculation is based on how much you saved and relative to where you fall within the income eligibility requirements,” Collinson said. “So it’s not just a straight 50 percent of the first $2,000 that you saved will be applied to the credit. It also takes into account where you fall within the income eligibility requirements. For the top people who will benefit the most it could be as much as $1,000 or as much as $2,000 for married couples. For many it will typically be much less than that but it still could mean $100 or $200, and why leave that on the table?”

What To Do About Past Credits Lost?

If a taxpayer hasn’t taken advantage of the Saver’s Credit in the past should they file an amended return to do so?

“That depends on the individual, as well as how they go about preparing their taxes,” Collinson said. “It may or may not be worth the time and the expense to file an amended return. That is up to the individual to do their homework and make that judgment call.”

Most importantly, “as people are thinking about their tax preparation and whether or not they are eligible for the Saver’s Credit, if they did not save in a 401(k) or a similar plan in 2014, and they’ve done their homework and they believe they are otherwise eligible, they can still fund an IRA up to April 15 to do that,” Collinson said.

Finally, Collinson says taxpayers should not confuse the Saver’s Credit with the ability to save on a tax-deferred basis in a 401(k) or similar plan or IRA.

“Many workers may be confusing these two retirement savings incentives,” Collinson said. “It sounds almost too good to be true that you could get a double benefit of one, being paid to save for retirement, and two, saving on a tax deferred basis. However, it this case, it’s true.”