February 2014

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Retirement Tax Credit for Low Earners

The IRS effectively gives money away to low-income Americans who save for retirement.

Workers meeting the agency’s income requirements can receive a Saver’s Tax Credit equal to as much as half of their total deposits into a 401(k) or IRA. The lower one’s income, the bigger the credit.

The program, which was made permanent in 2006, gives a nice boost to the nation’s lowest-paid workers, who are also most vulnerable in retirement. And not taking advantage of the credit, said Jim Blankenship, a financial planner in New Berlin, Illinois, “is a lot like giving up an employer match for a 401(k).”

Low-income workers do just that, a previous study found: 40 percent decline to participate when their employer offers a 401(k). But the Savers Tax Credit may provide another avenue to this under-covered population.

The annual income requirements for the credits, shown in the following table, apply to calendar year 2013 tax filings due April 15. …

*Note: Credits are equal to 10 percent, 20 percent, or 50 percent of total contribution.

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