An employer-sponsored retirement plan is a benefit provided by employers and a potential way for employees to save for retirement. But did you know that there may be additional tax filing considerations for both the participant and the company sponsoring the plan?

The IRS offers these tax credits to encourage employers and employees to participate in the retirement savings process. Retirement plan savings constitute a significant part of an individual’s retirement income, and tax programs such as these can offer a leg up to those who are astute enough to utilize them.

Participant Tax Credit

The Saver’s Credit (also known as the “retirement savings contribution credit”) is a rarely used tax credit that is offered by the IRS to encourage low and moderate income workers to make retirement contributions to any IRS recognized retirement account. In fact, only 36% of workers are aware that this tax credit exists.1

The credit amount is 50%, 20%, or 10% of your retirement account contribution depending on your adjusted gross income (AGI). The maximum contribution that can be claimed is capped at $2,000 ($4,000 if married filing jointly). In order to receive the credit, eligible plan participants should work with their tax advisor to consider whether filing IRS Form 8880 applies to their individual situation.

Retirement Savings Contribution's Credit Amounts

2019 Saver's Credit 
Credit Rate Married Filing JointlyHead of HouseholdAll Other Filers*
50% of your contribution AGI not more than $38,500 AGI not more than $28,875AGI not more than $19,250
20% of your contribution$38,501 - $41,500$28,876 - $31,125$19,251 - $20,750
10% of your contribution$41,501 - $64,000$31,126 - $48,000$20,751 - $32,000
0% of your contributionmore than $64,000more than $48,000 more than $32,000
2020 Saver's Credit
Credit RateMarried Filing JointlyHead of HouseholdAll Other Filers*
50% of your contributionAGI not more than $39,000AGI not more than $29,250AGI not more than $19,500
20% of your contribution$39,001 - $42,500$29,251 - $31,875$19,501 - $21,750
10% of your contribution$42,501 - $65,000 $31,876 - $48,750 $21,251 - $32,500
0% of your contributionmore than $65,000more than $48,751more than $32,500

*Single, married filing separately, or qualifying widow(er)

Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

Company Tax Credit

Start-up costs associated with establishing a retirement plan can be a challenge for small businesses considering implementing a retirement plan for their employees. The “Credit for Small Employer Pension Plan Startup Costs” (IRS Form 8881) offers a credit of 50% of ordinary and necessary startup costs up to $1000, offering a maximum credit of $500 per year. This can help offset the costs to set up and administer the plan, as well as educate employees about the plan(s) being offered. This credit can be claimed in the first three years of the plan and can be carried back or forward to other tax years.

To determine your eligibility, you should consult with a tax advisor regarding the various contingencies at play.

These contingencies include (but are not limited to): The business must not have had a retirement plan in place in the prior three years, and must have no more than 100 employees who were paid at least $5,000 in the previous year. It should also be noted that the credit is not available for owner-only plans; if you believe these limitations affect your eligibility, please consult with your tax advisor.

It’s important to understand the difference between a tax credit and a tax deduction. While a tax deduction can lower taxable income, a tax credit can be deducted from the taxes owed.

1 18th Annual Transamerica Retirement Survey: A Compendium of Findings About American Workers, PDF, page 21

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About the author

Les Risell

Senior Retirement Plan Specialist

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