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The following is a list of frequently asked questions published
by the IRS.
IRS Announcement 2001-106 ~ Published in Internal Revenue
Bulletin 2001-44
SAVER'S TAX CREDIT FOR CONTRIBUTIONS BY INDIVIDUALS TO EMPLOYER
RETIREMENT
PLANS AND IRAS
Announcement 2001-106
This announcement describes the new
"saver's credit," an income tax
credit that is available to eligible taxpayers who contribute to a
retirement plan or IRA. This announcement includes a sample
notice that
employers can give to employees explaining the credit.
Q-1: What is the saver's credit?
A-1: The saver's credit is a nonrefundable income tax credit for
certain
taxpayers with adjusted gross income that does not exceed
$50,000. It is
equal to a specified percentage of certain employee contributions
made to
an employer-sponsored retirement plan or of certain individual
or spousal
contributions to an individual retirement arrangement (IRA) for
taxable
years beginning after December 31, 2001, and before January 1,
2007. The
saver's credit is contained in section 25B of the Internal Revenue
Code,
which was added by section 618 of the Economic Growth and Tax
Relief
Reconciliation Act of 2001.
Q-2: Who is eligible for the saver's credit?
A-2: Taxpayers who are age 18 or over before the end of their
taxable
year, other than full-time students or persons claimed as
dependents on
another taxpayer's return, are eligible for the credit.
For this purpose, students include individuals
who, during some part of
each of five months during the year, are (a) enrolled at a
school that has
a regular teaching staff, course of study, and regularly enrolled
body of
students in attendance, or (b) taking an on-farm training
course given by
such a school or a state, county, or local government. A student
is a full-
time student if he or she is enrolled for the number of hours
or courses
the school considers to be full-time.
Q-3: What is the maximum annual contribution eligible for the
saver's
credit?
A-3: $2,000 per year.
Q-4: Is the amount of the annual contribution eligible for the
saver's
credit ever reduced?
A-4: Yes. The amount of any contribution eligible for the saver's
credit
is reduced by the amount of any taxable distribution received
by the
taxpayer (or by the taxpayer's spouse if the taxpayer filed
jointly with
that spouse both for the year during which a distribution was
made and the
year for which the credit is taken) from any plan described in A-5
below
during the testing period. The testing period consists of the
year for
which the credit is claimed, the period after the end of that year
and
before the due date (with extensions) for filing the taxpayer's
return for
that year, and the two taxable years that precede the year for
which the
credit is claimed. In the case of a distribution from a Roth
IRA, this
reduction applies to any such distribution, whether or not
taxable, that
is not rolled over. An amount does not count as a distribution
for
purposes of the reduction rule if the distribution is a return of
a
contribution to an IRA (including a Roth IRA) made for the tax
year and
(1) the distribution is made before the due date (including
extensions) of
the individual's tax return for that year, (2) no deduction is
taken with
respect to the contribution, and (3) the distribution includes any
income
attributable to the contribution.
For example, if an individual contributes
$3,000 to a 401(k) plan
during 2002, but had taken a $500 IRA withdrawal during that year
and a
$900 IRA withdrawal during 2001 and neither of these
withdrawals was
rolled over, the amount of that individual's 2002 plan
contribution
eligible for the credit is $1,600 ($3,000 - $500 - $900),
instead of the
$2,000 that would have been eligible for the credit if no
withdrawals had
been taken.
Q-5: What types of contributions are eligible for the saver's
credit?
A-5: Salary reduction contributions to the following
arrangements are
eligible for the credit: a 401(k) plan (including a SIMPLE
401(k)), a
section 403(b) annuity, an eligible deferred compensation plan
of a state
or local government (a "governmental 457 plan"), a
SIMPLE IRA plan, or a
salary reduction SEP. The saver's credit is also available for
voluntary
after-tax employee contributions to a tax-qualified retirement
plan or
section 403(b) annuity. For purposes of the credit, an employee
contribution will be "voluntary" as long as it is not
required as a
condition of employment. Finally, the saver's credit is
available for
contributions to a traditional or Roth IRA.
An amount contributed to an individual's IRA is
not a contribution
eligible for the saver's credit if (1) the amount is
distributed to the
individual before the due date (including extensions) of the
individual's
tax return for the year for which the contribution was made,
(2) no
deduction is taken with respect to the contribution, and (3) the
distribution includes any income attributable to the
contribution.
Q-6: What is the saver's credit rate?
A-6: The saver's credit rate is based on the taxpayer's
adjusted gross
income for the taxable year for which the credit is claimed, as
follows:
Adjusted
Gross Income
---------------------
Married filing Head of
All
other
joint
household
filers
Credit
-------------- ---------
---------
------
$0-$30,000 $0-$22,500
$0-$15,000
50% of contribution
$30,001-$32,500 $22,501-$24,375
$15,001-$16,250 20% of contribution
$32,501-$50,000 $24,376-$37,500
$16,251-$25,000 10% of contribution
Over $50,000 Over $37,500
Over $25,000
credit not available
For example, a taxpayer whose filing status is
single with adjusted
gross income of $15,000 may be entitled to a credit equal to
50% of his or
her contributions (up to $2,000 of contributions) to a plan
described in A-
5 above.
Q-7: Does the saver's credit affect an eligible individual's
entitlement
to any deduction or exclusion that would otherwise apply to the
contribution?
A-7: No. Eligible individuals entitled to deduct IRA
contributions or to
exclude plan contributions from gross income will be able to
deduct or
exclude those amounts and also claim the saver's credit.
Q-8: Can a taxpayer use the saver's credit to offset both an
alternative
minimum tax liability and a regular income tax liability?
A-8: Yes.
Q-9: For married taxpayers filing jointly, do contributions by or
for
either or both spouses give rise to the saver's credit?
A-9: Yes, contributions by or for either or both spouses, up to
$2,000 per
year for each spouse, can give rise to the saver's credit.
Q-10: Are salary reduction and after-tax employee contributions
that are
eligible for the saver's credit taken into account in the ADP
and ACP
nondiscrimination tests of sections 401(k) and (m) of the Internal
Revenue
Code?
A-10: Yes. Salary reduction contributions to a 401(k) plan,
whether or not
those contributions give rise to the saver's credit, are taken
into
account in the nondiscrimination test for salary reduction
contributions
(the ADP test) for plans subject to that test. Also, voluntary
after-tax
employee contributions to a qualified plan, whether or not
those
contributions give rise to the saver's credit, are taken into
account in
the nondiscrimination test for employee after-tax contributions
(the ACP
test) for plans subject to that test.
Q-11: Can an individual claim the saver's credit for an amount
contributed
to a plan pursuant to automatic enrollment?
A-11: Yes. Any amount that is treated as an elective
contribution on
behalf of an eligible individual to an employer plan described in
A-5
above can give rise to the saver's credit.
Q-12: Can an individual take a projected saver's credit into
account in
figuring the allowable number of withholding allowances on Form
W-4?
A-12: Yes. For information on converting credits into withholding
allowances, see IRS Publication 919, "How Do I Adjust My
Withholding?"
Q-13: Is there a sample notice that employers can use to help
explain the
saver's credit to employees?
A-13: Yes. Employers are encouraged to tell their employees about
the
credit. Employers can inform employees in any way they choose,
including
use of the notice set out below.
NOTICE TO EMPLOYEES REGARDING SAVER'S CREDIT:
This notice explains how you may be able to
pay less tax by
contributing to [insert name of employer's plan] (the
"Plan") or to an
individual retirement arrangement ("IRA").
Beginning in 2002, if you make contributions
to the Plan or to an IRA,
you may be eligible for a tax credit, called the "saver's
credit." This
credit could reduce the federal income tax you pay
dollar-for-dollar. The
amount of the credit you can get is based on the contributions you
make
and your credit rate. The credit rate can be as low as 10% or
as high as
50%, depending on your adjusted gross income -- the lower your
income, the
higher the credit rate. The credit rate also depends on your
filing
status. See the tables at the end of this notice to determine your
credit
rate.
The maximum contribution taken into account
for the credit for an
individual is $2,000. If you are married filing jointly, the
maximum
contribution taken into account for the credit is $2,000 each
for you and
your spouse.
The credit is available to you if you:
* are 18 or older,
* are not a full-time student,
* are not claimed as a dependent on
someone else's return, and
* have adjusted gross income (shown
on your tax return for the year
of the credit) that does not
exceed:
$50,000
if you are married filing jointly,
$37,500
if you are a head of household with a qualifying person,
or
$25,000
if you are single or married filing separately.
EXAMPLE: Susan and John are married and file
their federal income tax
return jointly. For 2002, their adjusted gross income would
have been
$34,000 if they had not made any retirement contributions. During
2002,
Susan elected to have $2,000 contributed to her employer's
401(k) plan.
John made a deductible contribution of $2,000 to an IRA for 2002.
As a
result of these contributions, their 2002 adjusted gross income
is
$30,000. If their Federal income tax would have been $3,000 (after
applying any other credits to which they are entitled) without
having made
any retirement contributions, then their federal income tax as a
result of
making the $4,000 retirement contributions will be only $400
after
application of the saver's credit and other tax benefits for the
retirement contributions. Thus, by saving $4,000 for their
retirement,
Susan and John have also reduced their taxes by $2,600.
The annual contribution eligible for the credit
may have to be reduced
by any taxable distributions from a retirement plan or IRA that
you or
your spouse receive during the year you claim the credit, during
the 2
preceding years, or during the period after the end of the year
for which
you claim the credit and before the due date for filing your
return for
that year. A distribution from a Roth IRA that is not rolled
over is taken
into account for this reduction, even if the distribution is not
taxable.
After these reductions, the maximum annual contribution
eligible for the
credit per person is $2,000.
EXAMPLE: Mark's adjusted gross income for 2002
is low enough for him to
be eligible for the credit that year and he defers $3,000 of
his pay to
his employer's 401(k) plan during 2002. During 2001, Mark took a
$400
hardship withdrawal from his employer's plan and during 2002 he
takes an
$800 IRA withdrawal. Mark's 2002 saver's credit will be based on
contributions of $1,800 ($3,000 - $400 - $800).
The amount of your saver's credit will not
change the amount of your
refundable tax credits. A refundable tax credit, such as the
earned income
credit or the refundable amount of your child tax credit, is an
amount
that you would receive as a refund even if you did not otherwise
owe any
taxes.
The amount of your saver's credit in any year
cannot exceed the amount
of tax that you would otherwise pay (not counting any refundable
credits
or the adoption credit) in any year. If your tax liability is
reduced to
zero because of other nonrefundable credits, such as the Hope
Scholarship
Credit, then you will not be entitled to the saver's credit.
CREDIT RATES
If your income tax filing status is
"married filing joint"
and your adjusted gross income is:
Your
saver's credit rate is:
-----------------------------------
----------------------------
$0-$30,000
50%
of contribution
$30,001-$32,500
20%
of contribution
$32,501-$50,000
10%
of contribution
Over $50,000
credit
not available
If your income tax filing status is
"head of household"
and your adjusted gross income is:
Your
saver's credit rate is:
-----------------------------------
----------------------------
$0-$22,500
50%
of contribution
$22,501-$24,375
20%
of contribution
$24,376-$37,500
10%
of contribution
Over $37,500
credit
not available
If your income tax filing status is
"single," "married filing separate,"
or "qualifying widow(er)" and your
adjusted gross income is:
Your
saver's credit rate is:
------------------------------------------
----------------------------
$0-$15,000
50%
of contribution
$15,001-$16,250
20%
of contribution
$16,251-$25,000
10%
of contribution
Over $25,000
credit
not available
DRAFTING INFORMATION
The principal author of this announcement is
Roger Kuehnle of the
Employee Plans, Tax Exempt and Government Entities Division. For
further
information regarding this announcement, please contact the
Employee
Plans' taxpayer assistance telephone service at 1-877-829-5500 (a
toll-
free number), between the hours of 8:00 a.m. and 9:30 p.m.
Eastern Time,
Monday through Friday. Mr. Kuehnle may be reached at (202)
283-9888 (not a
toll-free number).
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