At the same time that the government seems to want to claw back some of the tax benefits of workplace retirement plans like 401(k)s and 403(b)s for higher income investors, there’s a double tax benefit available to lower income workers that very few know about that can be used to encourage them to save called the Saver’s Credit or Retirement Savings Contributions Credit.
Depending on their income, workers can get an additional $1,000-$2,000 tax credit if they participate in their employer’s retirement plan. According to a Transamerica survey, less than 25% of these people are even aware of this benefit because it’s not in the IRS 1040EZ Form. Workers earning up to $30,750 in 2016 are eligible; the income for heads of households is $46,125 and $61,500 for married couples which makes up an estimated 70% of workers eligible.
The key to promulgating this benefit is proper communications. Lower income workers often struggle with how to afford to contribute to their company’s retirement plan but free money from the government is a big incentive just as encouraging people to save up to the match can be powerful.
People often think that contributing a dollar into their retirement plan means that there is a dollar less to spend now but that’s just not the case. With a match, tax deferral and the Saver’s Credit, the burden might be significantly less. But as with the match, it’s much more powerful to actually calculate the amount that a person will be getting back by participating in the company’s retirement plan compared to percentages or general information.
Though it seems daunting, the math is simple and the results can be amazing. An attendee at a TPSU program created a spreadsheet letting people know how much money they left on the table by not deferring up to the can dramatically boosting participation and increasing deferrals. The Saver’s Credit or Retirement Savings Contributions Credit may also help.
