The Saver’s Credit, which was created in 2001 to help incentivize low and moderate income workers to save for retirement, has been dramatically underutilized, research finds, in large part because many lower-income workers don’t have access to a workplace defined contribution plan.

To file for the Saver’s Credit, a person must have made contributions to a qualified retirement plan, like an IRA, 401(k), 403(b) or 457, but “among individuals whose income makes them eligible for the credit, many lack access to retirement accounts at work and cannot save through payroll deduction,” according to the National Institute on Retirement Security.

“We want to build awareness of it and highlight its features and how to make it more approachable for many individuals,” says Diane Oakley, executive director of the National Institute on Retirement Security.

One way to do that is to get retirement plan sponsors to help educate their employees about what the Saver’s Credit could do for their future retirement or encourage them to offer payroll deduction, so employees can have money directly withdrawn from their paychecks and deposited into an IRA if a workplace plan is not available.

The main reasons low and moderate-income workers don’t apply for the credit is that they don’t contribute to a qualified retirement plan or they have insufficient tax liability. These two things, combined with a lack of awareness of the credit among taxpayers, limit its use, according to NIRS.

About 55 million workers don’t have access to an employer-sponsored retirement plan, and women, younger workers and minorities are more likely to work for employers who don’t have retirement plans, NIRS found.

Small businesses are especially at risk. NIRS found that 49% of employees of large companies have access to a workplace retirement plan, but only 38% of workers at small businesses have access. A small business is classified as any company with fewer than 100 employees.

David John, AARP senior strategic policy advisor, points out that in theory these low-income and moderate-income individuals who don’t have access to payroll deduction at work could be saving for retirement in an IRA, but “only one in 20 people who have the ability to save in an IRA do so on a consistent basis. Lower income individuals need payroll deduction.”

To make the Saver’s Credit more useful, NIRS recommends the government make it a savings match, make it easier to claim, increase eligibility to claim the credit, replace cliff income limits with a gradual phase-out, and create state tax benefits similar to other tax credits.

Oakley believes the credit could be improved in ways that would increase utilization and increase retirement security for workers so more workers are getting to retirement with assets and resources beyond Social Security.

To qualify for the credit, an individual must make less than $62,000 annually if married or $31,000 annually if single. They also can’t claim the credit on the 1040EZ form. They must fill out the long form 1040 or 1040A. They also must complete a Form 8880 to calculate the amount of the Saver’s Credit.

According to NIRS, only 3.25% to 5.33% of eligible filers claimed the credit between 2006 and 2014, and the average value of the credit was $156 to $174.

“The proportion of the workforce, taxpayers, who could claim the credit has been steady and roughly declining by about 1% over the last few years or so,” says John.

AARP and NIRS recommend making the Saver’s Credit a savings match, giving eligible savers a match equal to 50% of the amount they contributed to retirement savings during that tax year. The match would be claimed through their tax return but would go directly into their retirement savings account for use in retirement. The match would phase out gradually for higher incomes, NIRS says.

The Women’s Institute for a Secure Retirement developed The Appalachian Savings Project in Ohio and West Virginia between 2012 and June 2015 to test out the impact of matched savings on low income child care workers.

Participants received a $50 match to establish an account with TreasuryDirect, the U.S. Treasury’s online site, and another $50 if they directed at least $50 of their tax refund toward the purchase of I-Bonds. The project then matched 50% of savings after a year of participation, up to $400.

“This match was used to simulate an expanded and refundable Saver’s Tax Credit to measure its effects on savings rates,” according to WISER. “The project demonstrated that basic, easy-to-access savings vehicles combined with savings incentives can result in increased savings for low-income workers who have few other saving and investment options.”

Because of the program, the 30 program participants saved an average of $1,150, which was about 5.5% of their average annual incomes, according to WISER. They also purchased an average of $767 in I-Bonds over the course of one year and received a match of $383.

NIRS recommends that filers be allowed to claim the credit on their 1040EZ form and eliminate the need for the form 8880. It also suggests increasing the income limits so more people would be eligible for the Saver’s Credit. It also recommends replacing the three levels of credit based on exact-dollar income limits with one level that is phased out gradually.

Currently, individuals making no more than $18,500 or married couples making no more than $37,000 can receive a credit of 50% of their retirement plan contribution. Those making $20,001 to $31,000, as individuals, or $40,001 to $62,000 for married couples, are only eligible for a 10% match on their contribution.

NIRS also believes that if states are allowed to sponsor retirement savings plans for small businesses, it will increase the opportunity for a greater number of people to file for the Saver’s Credit.

States could create additional tax benefits that would be both on top of the federal Saver’s Credit and linked to it such as what was done with 529 college savings plans, Maryland’s Long-Term Care Credit and Indiana’s Unified Tax Credit for the Elderly, NIRS says.

“The Saver’s Credit could certainly be modified to do a better job in helping Americans with the hardest task to save for retirement and who may not be covered by an employer,” says Oakley. “Having them offered coverage and access to savings is important so we have to find other resources to do that.”

She adds that improving the Saver’s Credit would help increase retirement savings and ultimately reduce the potential future costs to the states and federal government because of aging populations, demands on services and safety net levels.
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