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April 2, 2019
The Retirement Savings Contribution Credit
The 116th Congress has shown interest in advancing
$32,000. These income thresholds are adjusted annually for
policies that support retirement savings and retirement
inflation.
security. One provision designed to encourage retirement
savings for low-income workers is the Retirement Savings
Figure 1. Maximum Amount of Saver’s Credit per
Contribution Credit, or the Saver’s Credit (Internal Revenue
Individual, 2019
Code [IRC] §25B). This In Focus provides an overview of
By Filing Status and Income Level
the credit and provides a brief discussion of the credit’s
effectiveness, in the context of various policy options that
might be considered in the 116th Congress.
The Saver’s Credit
Eligible low-income taxpayers may be able to claim a
nonrefundable tax credit for contributions to certain
retirement accounts. The maximum credit amount is $1,000
per person making eligible contributions.
To claim the tax credit, the individual making the
contribution must (1) be at least 18 years old; (2) not be
claimed as a dependent on someone else’s tax return; and
(3) not be a full-time student.
Source: CRS and IRC Section 25B.
Retirement savings of up to $2,000 per person may be tax
As is discussed below, while the maximum amount of the
credit eligible. Qualified retirement savings include
credit is $1,000 for each person making qualifying savings
contributions to traditional and Roth IRAs as well as 401(k)
contributions, most taxpayers claim much smaller amounts.
and similar retirement plans. From 2018 through 2025,
The maximum tax credit is available only to the lowest-
contributions made by an individual to his or her Achieving
income taxpayers who (1) are less likely to have the
a Better Life Experience (ABLE) account may also be
financial capacity to save; and (2) are less likely to have a
treated as qualified savings for the purposes of calculating
positive tax liability to reduce with a nonrefundable tax
the Saver’s Credit.
credit.
The tax credit rate depends on a taxpayer’s filing status and
Legislative Background
the taxpayer’s adjusted gross income (AGI). The maximum
The Saver’s Credit was added to the IRC in the Economic
credit rate of 50% is available to taxpayers with AGI below
Growth and Tax Relief Reconciliation Act of 2001
$38,500 for married taxpayers filing joint returns ($28,875
(EGTRRA; P.L. 107-16). When the credit was enacted,
for head of household filers and $19,250 for other filers) in
Congress believed that providing an additional tax incentive
2019 (see Figure 1).
for low- and middle-income taxpayers would enhance their
ability to save for retirement. Inadequate retirement savings
At certain AGI thresholds there are “cliffs.” At these cliffs,
of low- and middle-income taxpayers was cited as a policy
the credit rate is immediately reduced. For married
concern, and Congress observed that lower-income families
taxpayers filing a joint return, the credit rate is reduced to
spend a larger portion of household budgets on necessities,
20% once AGI reaches $38,500, and 10% once AGI
leaving limited resources for retirement savings. When first
reaches $41,500. Thus, if a taxpayer earning $38,500 and
enacted, the credit was temporary, initially scheduled to be
claiming a $1,000 credit earns one more dollar, the
effective for tax years 2002 through 2006.
maximum amount of credit that could be claimed falls to
$400. No credit is available for married taxpayers filing
The Saver’s Credit was made permanent in the Pension
joint returns once AGI reaches $64,000.
Protection Act of 2006 (P.L. 109-290). This legislation also
indexed the income limits applicable to the Saver’s Credit
For head of household taxpayers, the credit rate is 20%
to inflation beginning in 2007 (from 2002 through 2006 the
once AGI exceeds $28,875, and 10% once AGI exceeds
AGI thresholds were fixed).
$31,125, with no credit for taxpayers with AGI above
$48,000. For all other filers, the threshold for the 20%
The 2017 tax act (P.L. 115-97, commonly known as the
credit is $19,250, and the threshold for the 10% credit is
“Tax Cuts and Jobs Act”) temporarily, through 2025,
$20,750, with no credit available once AGI is above
allows taxpayers to claim the Saver’s Credit for
contributions to ABLE accounts. ABLE accounts are a tax-
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favored savings program designed specifically for
The Joint Committee on Taxation (JCT) estimates the
individuals with disabilities.
Saver’s Credit reduces tax revenue by $1.2 billion per year
(FY2018 through FY2022).
Saver’s Credit Statistics: Who Claims?
How Much? What’s the Cost?
Does the Credit Increase Savings for
Few taxpayers claim the credit, and the average credit claim
Low-Income Taxpayers?
is small. In 2016, 5.6% of taxpayers claimed the Saver’s
Empirical studies have found the Saver’s Credit ineffective
Credit, and the average credit amount claimed was $182
at increasing retirement savings among the target
(Table 1). This is for all taxpayers, regardless of whether
population (low-income taxpayers). Overall, the take-up
they have AGI that would make them eligible.
rate for the Saver’s Credit is low. Further, it is not clear that
the Saver’s Credit results in additional savings, as opposed
Since the credit first became available in 2002, the share of
to rewarding taxpayers for savings that would have
taxpayers claiming the credit has slowly trended up. In
occurred without the Saver’s Credit.
2002, 4.1% of tax returns filed had a Saver’s Credit claim.
The average credit amount was $199 the first year the credit
A feature of the tax credit that potentially limits
was available (in 2002). Average credit amounts fell during
effectiveness is that the credit is nonrefundable. According
the late 2000s, before rising again to the current level.
to the Tax Policy Center, in 2018, 81.8% of taxpayers with
cash income between $10,000 and $30,000 did not have a
The take-up rate for the credit varies across the income
positive income tax liability. For cash incomes in the
distribution. At very low levels of income, those with AGI
$30,000 to $50,000 range, 53.6% did not have a positive tax
below $10,000, 0.02% of taxpayers claim the credit (Table
liability. For the lowest-income taxpayers, those with
1). Few taxpayers at this income level have a positive tax
positive cash incomes of less than $10,000, 99.8% had no
liability. The taxpayers who do claim the credit from these
tax liability. Since the Saver’s Credit is nonrefundable, only
income groups, however, tend to claim higher credit
taxpayers with positive tax liability benefit from the credit.
amounts. These taxpayers are eligible for the 50% tax credit
rate. Having zero or negative AGI in a given year may be
Even if the Saver’s Credit encourages additional retirement
temporary. Taxpayers in this position may be able to draw
savings, it may not increase overall savings. One barrier to
on other resources to make retirement contributions, which
retirement savings via IRAs is the early withdrawal penalty.
may explain the higher average credit amount for this
If the Saver’s Credit helps overcome this barrier, it is
group.
possible that taxpayers choose to shift other forms of
savings into retirement accounts, but do not necessarily
In 2016, 13.6% of taxpayers with AGI of $25,000 up to
increase total savings. Not all taxpayers are aware of the
$50,000 claimed the Saver’s Credit (Table 1). Depending
credit, however, and lack of awareness may be another
on their filing status, taxpayers in this AGI group may have
barrier impeding the credit’s effectiveness.
a lower credit rate (40% or 20%), or not be eligible for the
Saver’s Credit at all. For taxpayers in this income group
While evidence suggests that the Saver’s Credit is not
claiming the Saver’s Credit is 2016, the average credit
effective at increasing savings, some taxpayers do respond
amount was $190.
to the credit. There is some evidence that taxpayers “bunch”
at the income threshold amounts, adjusting income to
In the $50,000 to $75,000 AGI group, only married
maximize tax credits at points just below the cliff.
taxpayers filing joint returns with AGI below the final
income threshold could claim the credit, and the maximum
Policy Options
credit amount was $200 per contributor (or $400 for a
There are various policy options that might address some of
married couple filing jointly).
the reasons the Saver’s Credit is believed to fall short. In
Table 1. Share of Tax Returns Claiming Saver’s Credit
recent years, there have been a number of legislative
and Average Credit Amount, 2016
proposals. In the 115th Congress, the Retirement Security
and Savings Act of 2018 (S. 3781) would have enhanced
AGI
Share Claiming
Average Credit
the credit and made the credit refundable, although the
credit would be paid to retirement accounts instead of being
No AGI
0.0%a
$957
claimed as a credit against tax. The Encouraging Americans
$1 – <$10K
0.0%a
$245
to Save Act of 2018 (S. 3636) would have replaced the
Saver’s Credit with a match for lower-income taxpayers
$10K – < $25K
7.1%
$171
contributing to certain retirement accounts, transferring
$25K - <$50K
13.6%
$190
matching funds directly into retirement accounts as opposed
to reducing tax bills. In the 113th Congress, the Savings for
$50K - <$75K
6.4%
$168
American Families’ Future Act of 2013 (H.R. 837) would
have expanded the Saver’s Credit, made the credit
$75K+
0.0%
$0
refundable, and provided a larger credit if deposited into a
retirement account as matching funds.
All Taxpayers
5.6%
$182
Source: CRS and IRS Statistics of Income (SOI).
Others have proposed that the Saver’s Credit be allowed for
a. The share claiming the credit is nonzero but rounds to 0.0%.
additional types of savings, such as for contributions to tax-
deferred college savings accounts (for example, the Boost
Saving for College Act [S. 1790] in the 115th Congress).
https://crsreports.congress.gov
The Retirement Savings Contribution Credit
IF11159
Molly F. Sherlock, Specialist in Public Finance
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