Saver's Credit Left Off 2005 Budget

February 23, 2004 (PLANSPONSOR.com) - The Retirement Savings Credit has been left off of President Bush's 2005 federal budget proposals, leaving some people to wonder if the tax break for the not so wealthy could be out the door.

Retirement Savings Credit, more commonly referred to as a ” Saver’s Credit,” is an income tax credit specifically designed to encourage lower-income workers to save for retirement. Under the credit, a participant with anadjusted 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.

Even with some positive signs emerging from the utilization of the credit, its exclusion from the rhetoric of Washington budget speak may not come as a complete surprise. As the Saver’s Credit was originally written into the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), it is set to expire in 2006. Additionally, the omission presumably is to make way for two new Bush administration retirement programs, Retirement Savings Accounts (RSA) and Lifetime Savings Accounts (LSA) that would have no income limit or any immediate tax savings.

Further, RSAs and LSAs are designed to be simpler and more generous than existing savings plans even containing provisions that would allow for the withdraw of money before retirement age without penalty and use it for any purpose.Although contributions to the accounts would be taxable, all investment income and withdrawals would be exempt from taxes.

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