There are a lot of federal rules that muddy the retirement industry, experts say, but there is one that helps historically bad savers put money into their accounts.
It's called the Savers Credit, and it's a tax credit of up to $2,000 given to lower- and middle-income workers who contribute to nearly any type of retirement plan. People who qualify can also get the credit by putting money into an Individual Retirement Account.
The program has been around since 2002 and is run by the Internal Revenue Service. Even though it is a separate program from company retirement plans, plan sponsors should tell their workers about it and use it as a way employees can improve their benefits, says David Wray, president of the Plan Sponsor Council of America.
"We know there is a correlation between people's financial situation and their ability to save," Wray says. "Companies have not been communicating the Savers Credit. If you are not telling workers about this, you are not delivering the maximum benefit to your participants."
The Savers Credit is geared toward low- to middle income workers who typically are the least likely to save for retirement. Historically, those workers save less than higher-income workers, studies have shown.
On average, workers making less than $30,000 a year contributed 4.8 percent of pre-tax pay to 401(k) plans in 2010, according to Vanguard's How America Saves survey. By comparison, workers making $75,000 or more put 8.3 percent of pay into their retirement accounts.
In 2009, more than $1 billion was claimed under the Savers Credit on 6.25 million individual income tax returns, the IRS reported. The average credit was $202 for joint filers, $159 for heads of households and $121 for single filers, IRS figures show.
Karen Rhodes, human resources director for Red River Credit Union in Texarkana, Texas, says she tells every employee about the program. She also weaves it into open enrollment because some of health care choices and pre-tax contributions that employees may make can affect their adjusted gross income.
"If they get their adjusted gross income down to a certain level, it might allow them to qualify for the Saver's Credit," Rhodes says. "It gets people to think twice about doing certain things like flexible savings accounts."
Rhodes recently had 20 new employees sign up for the company's 401(k) plan. At first, three employees said they couldn't contribute because they needed the money. Rhodes showed them how they would qualify for the Savers Credit and got two to contribute 10 percent of pay and the third employee to put in 5 percent of pay into their retirement accounts.
"I've had a lot of young folks say right off the bat that they just can't do it right now," Rhodes says. "When I show them how it's possible, they are absolutely thrilled."
As with any federal program, there are a few qualifiers to claim the credit. First, workers must be at least 18 years old and not be a student for more than five months out of the year. If they file a claim, they also have to file federal income taxes and can't be a dependent on someone else's return.
The credit is good this year for married couples filing jointly making up to $56,500, heads of households with incomes of up to $42,375, and singles making up to $28,250.
Patty Kujawa is a writer based in Milwaukee. Comment below or email firstname.lastname@example.org.