Your Retirement Account Could Get an Infusion of Cash Under This Plan

A provision of the $3.5 trillion Democratic budget plan may boost the retirement savings of certain moderate- and low-income workers.

A provision of the $3.5 trillion Democratic budget may boost the retirement savings of moderate- and low-income workers. A proposal advanced by the House Ways and Means Committee on Thursday would make the Saver’s Credit refundable for those who don’t owe any taxes. If the provision becomes law, eligible workers would receive the annual tax credit in the form of a contribution to their retirement accounts, boosting the retirement savings of millions of Americans.

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What Is the Saver’s Credit?

First implemented through the Economic Growth and Tax Relief Reconciliation Act of 2001, the Saver’s Credit incentivizes moderate- and low-income workers to save more for retirement. The credit, which became permanent under the Pension Protection Act of 2006, is worth a portion of a person’s annual contribution to their individual retirement account (IRA) or employer-sponsored retirement plan. This ranges from 50% for lower-income workers down to 10% for those earning a more moderate income.

However, the size of the credit ultimately depends on a person’s income level, filing status and annual retirement contributions. The maximum credit for an individual in 2021 is $1,000, while $2,000 is the maximum that a married couple filing jointly can claim.

The income thresholds for the credit change each year. You can find the income limits for the 2021 tax year in the table below.

2021 Saver’s Credit Income Limits Credit Amount Single Head of Household Joint Filers 50% of contribution AGI of $19,750 or less AGI of $29,625 or less AGI of $39,500 or less 20% of contribution $19,751 – $21,500 $29,626 – $32,250 $39,501 – $43,000 10% of contribution $21,501 – $33,000 $32,251 – $49,500 $43,001 – $66,000 0% of contribution more than $33,000 more than $49,500 more than $66,000

It’s important to remember that tax credits are distinct from tax deductions. While traditional IRA and 401(k) contributions are tax deductible and lower a person’s taxable income, a tax credit reduces the amount of taxes a person owes, dollar for dollar.

Democrats Want to Make Saver’s Credit Refundable

Under current law, the Saver’s Credit is a nonrefundable credit, meaning it can reduce a person’s tax liability down to $0, but it will not result in a cash refund. Now, though, congressional Democrats are proposing to make the tax credit refundable, allowing certain filers with zero tax liability to receive the credit in the form of a contribution to their retirement account.

For example, Susan will earn $41,000 in 2021, but her husband is unemployed and will not have any income. If Susan contributes $2,000 to her IRA this year, she will deduct the contribution from her adjusted gross income on her joint tax return, bringing her taxable income down to $39,000. As a result, Jill and her husband are eligible to claim a 50% credit on her $2,000 IRA contribution, and potentially reduce their tax liability by $1,000.

Under the Democratic proposal, however, the $1,000 would be deposited into Jill’s IRA, assuming she and her husband do not owe any taxes.

Another Measure to Boost Retirement Savings

In addition to the Saver’s Credit provision, the Democrats are looking to require certain employers that do not offer retirement plans to automatically enroll employees in IRAs or 401(k)-type plans.

During the markup of the $3.5 trillion Build Back Better Act, the House Ways and Means Committee on Thursday voted 22-20 in favor of advancing both retirement-related measures.

“Automatic IRAs and Saver’s Credit enhancements would dramatically expand retirement savings in the United States,” Ways and Means Committee Chair Rep. Richard Neal said in his opening statement Thursday. “According to recent analysis commissioned by the American Retirement Association, implementing these proposals could add up to $7.0 trillion in additional retirement savings over a 10-year period – and create more than 62 million new retirement savers.”

Neal added that the two provisions would especially help Hispanic, Asian and Black workers, who are less likely to to have access to work-sponsored retirement plans. Neal said the enhancements would result in seven million new Black savers and 10.8 million new Latino savers.

“Now is the time to confront these issues head-on – the longer we wait, the worse the crisis will become, and millions more Americans will find themselves in untenable circumstances in their later years,” Neal said.

Bottom Line

The Democrats are looking to boost retirement savings of millions of eligible Americans by making the Saver’s Credit fully refundable. Under the plan, certain filers who do not owe taxes would receive their credit as a contribution to their retirement account. Democrats are also seeking a change that would require some employers who do not currently sponsor retirement plans to automatically enroll employees in an IRA or 401(k).

Retirement Saving Tips

Do you know how much you’ll need for retirement? Try using SmartAsset’s free Retirement Calculator to determine how much you may need to save to have the retirement you want.
Moving to another state or a different area may be something to consider as you plan for retirement, especially if you currently live in a high-tax state. Our study on where retirees are moving in 2021 examined Census Bureau data to find the places that are most popular.
A financial advisor can help you create a plan for retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.