In the Spotlight

Credit Low-income Americans for Saving

By Tom Foster

Retirement security is seemingly attainable by only the most affluent among us. But it doesn’t have to be so.

High-income families are considerably more likely to be saving for retirement than low-income families. A 2013 study by the Economic Policy Institute reported that 88 percent of workers in the top quintile (top 20 percent) of earners had retirement accounts. Meanwhile, only 8 percent of workers in the lowest 20 percent of earners could say the same.1

Anecdotally, employers that sponsor 401(k)s and other defined contribution retirement plans say   that it’s a challenge to persuade their lower-paid employees to put something away for retirement. After they meet basic needs such as rent, food, car payments and other necessities, low-income Americans often don’t have much left for anything else.

Some relief may be available, though, for those thrifty enough to focus on their retirement. The Federal government encourages retirement savings by low-income individuals, couples and families through the Retirement Savings Contributions Credit (also known as the “Saver’s Credit”). It’s an often-overlooked opportunity to help many people stretch their dollars and save for the future. Financial advisors can perform an important service to both employers and their employees by making plan sponsors aware of the credit and helping promote it to encourage overall financial wellness.

The Saver’s Credit can be taken for contributions to a 401(k) or other defined contribution plan, a traditional or Roth IRA, SIMPLE IRA, or other qualified plan, subject to certain conditions. The amount of the credit is provided on a sliding scale and determined by adjusted gross income (AGI).

For instance, for the 2016 tax year, a married couple that files their taxes jointly and has an AGI of not more than $37,000 can obtain a credit of 50 percent of their retirement savings. The credit drops to 10 percent of retirement contributions for a married couple filing jointly with an AGI of $40,001--$61,500 and phases out completely for incomes above the latter threshold.2

A single individual who does not file as head of a household could qualify for the 2016 tax year for a 50 percent credit if his or her AGI does not exceed $18,500. Admittedly, that is very low – certainly a job that paid not much above the minimum wage – but the incentive is there nevertheless. The saver could still qualify for a 10 percent credit if his or her income did not exceed $30,750.2

The IRS offers an example: Let’s say Jill works at a local retail store, is married and earned $35,000 in 2015. Her husband, Mike, was unemployed and had no earnings. Jill scrimped and managed to contribute $1,000 to her IRA. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $34,000. Jill may claim a 50 percent credit, $500, for her $1,000 IRA contribution.

Employers and other plan fiduciaries should consider the importance of encouraging employees to contribute to their employer-sponsored retirement plans to promote financial wellness.

So if you have a client who sponsors a retirement plan and who may have employees who could benefit from the Saver’s Credit, consider discussing the Saver’s Credit. It can help both the employer and his or her employees enjoy a more comfortable retirement.


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E. Thomas Foster Jr. is Assistant Vice President, Strategic Relationships, for Massachusetts Mutual Life Insurance Co. (MassMutual).

Here’s How Much the Average Family Has Saved for Retirement, Business Insider,