>Section 618 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for the Retirement Savings Credit, more commonly referred to as a “Saver’s Credit,” as an income tax credit specifically designed to encourage lower-income workers to save for retirement. Under the credit, a participant with an adjusted gross income that does not exceed $50,000 for couples and $25,000 for singles could receive a credit for contributions to their employers defined contribution plan.
For example, a single taxpayer with adjusted gross income of $15,000 could receive a credit a reduction of taxes owed equal to half of his or her contributions (up to $2,000 of contributions). So, if he contributes $1,000 to his 401(k), he will be able to reduce his federal income tax bill by $500. That is in addition to the benefits of pre-tax savings and any employer match. Contributions by or for either or both spouses, up to $2,000 per year for each spouse, can give rise to the Saver’s Credit.
The credit definitely did not go by last year unnoticed. It is estimated 3.7 million low- to modest-income tax filers put money into a 401(k) or an Individual Retirement Account (IRA) last year due to provisions in the Saver’s Credit.
However, the future of the credit may be in doubt as it was left off of the President Bush’s 2005 federal budget proposals. Unless extended by the U.S. Congress, the credit will expire after 2006 (See Saver’s Credit Left Off 2005 Budget).
A copy of the CRS report is available under the “Related Readings” sidebar.