Many Miss Out on Retirement Tax Credit

BOSTON (TheStreet) -- A federal income tax credit of up to $2,000 may be overlooked by most Americans with retirement plans who can take advantage of it.

The Saver's Credit is designed as an incentive for low- to middle-income workers to save for retirement. But, according to the Transamerica Center for Retirement Studies, very few workers who may be eligible may even know it exists.

The Saver's Credit may be applied to the first $2,000 of voluntary contributions an eligible worker makes to a 401(k) or similar employer-sponsored retirement plan or IRA. Credits of up to $1,000 for single filers and $2,000 for married couples are offered.

But only 12% of full-time workers with annual household incomes of less than $50,000 are aware of the credit, according to a survey conducted by the center of 3,598 full-time and part-time workers.

"There are people who meet the income eligibility requirement and are saving through a 401(k) plan who could be claiming the credit, but they just don't know about it," says Catherine Collinson, president of the center, which is funded by contributions from Transamerica Life Insurance.

The center is advocating improved outreach.

"It seems like over time it has gotten lost in the shuffle," she says of the credit. "It was introduced all the way back in 2001 and made permanent in 2006 with the Pension Protection Act. It is there and available, but I think the outreach has just moved on to other tax credits and other types of things."

Taxpayers can only claim the credit on Forms 1040A, 1040 and 1040NR.

"One of the concerns is that, especially for people saving in a 401(k) plan, it is not reflected on the 1040EZ form," Collinson says. "Lower- to middle-income workers are probably the most likely of all income levels to use the 1040EZ form, and because there's no place to put it on the form, they may be completely missing the tax credit ... and are simply not aware of it."

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