Recently, a friend retired at age 64 after a long and successful career in sales. In his first year of retirement, his income dropped from six figures into the mid fives. To avoid idle time, he continues to handle a few accounts and earn some commissions – part of which he socks away in a Roth IRA.

After preparing his 2015 federal 1040 return in Turbo Tax, he said: “Uncle Sam gave me a $200 tax credit that I’ve never seen on my return before. I don’t even know what it is.” I asked him where the credit is shown on the 1040 and he said line 51.

For the first time in his life, he qualified for the Retirement Savings Contributions Credit – the Saver’s Credit in short.

Based on his reported adjusted gross income (AGI), the federal government matched $200 of the first $2,000 he contributed to his IRA. Next year, if his income declines more, as he expects, the government may match even more, up to 50% of the first $2,000 contributed – $1,000.

Many retired people are stumbling into the Saver’s Credit by accident, and others are overlooking and perhaps failing to claim it. For retirees and pre-retirees, the credit can be a good reason to keep making plan contributions as long as possible. In the case of a Roth IRA, “as long as possible” is for life.

Most retired or semi-retired taxpayers with income below the AGI thresholds are potentially eligible for a Saver’s Credit. The main requirement is to have earned income and make a contribution to a 401(k), SIMPLE, SEP, Traditional IRA, Roth IRA or other type of qualified plan. (Rollover contributions don’t qualify.) The IRS has published the 2016 AGI thresholds and eligibility criteria.

The Saver’s Credit was created in 2001 (and made permanent in 2006) mainly to give young people and low-income workers an incentive to contribute their own money to a retirement plan. The maximum credit is $1,000 per year for a single person and $2,000 for a married couple, when both spouses make plan contributions.

However, to receive benefit from the credit, taxpayers must owe federal income tax in the same year, because it isn’t refundable.

Earlier this year, U.S. Senator Ron Wyden (D-OR) introduced in the Senate the Encouraging Americans to Save Act, which would: 1) make the Saver’s Credit refundable; 2) increase the AGI thresholds for eligibility; and 3) facilitate direct deposit of the credits into the taxpayer’s retirement plan.

Under Wyden’s bill, the credit would be available to married filing-jointly taxpayers with up to $65,000 in AGI. This change potentially could sweep millions of retirees and pre-retirees into eligible status, provided they can generate a few dollars of earned income each year and qualify for IRA contributions. You can see a summary of the bill at the Congress.gov site.

An informative backgrounder on the credit and legislation, developed by the Center for Retirement Research at Boston College, is available.

Instant Insights /

How the Saver&rsquo;s Credit can work for both old and young

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How the Saver’s Credit can work for both old and young