Certainly the project I mentioned in my last post — building an online platform for individual donations to support matched savings programs and savers — strikes me as innovative and important for the field, so the SaveTogether team will probably propose that (although we’re already engaged in some collaborative work with several staff at CFED on developing this project and thus the idea doesn’t really need to be nominated to come to their attention).
But there’s another (innovative?) idea that has been rattling around my brain recently that has to do with the underutilized Saver’s Credit, a federal tax credit for low- to moderate-income people who make investments in 401k or IRA retirement plans. This credit offers a match of up to 50% (a maximum credit of $2,000 for a married couple), and the match phases out altogether for couples earning more than roughly $53,000.
Working with many self-employed microentrepreneurs in my “Assets for Artists” program, I worry for some of them being able to get by in retirement. Most artists don’t have access to an employer-sponsored 401k plan, and some of them have been making only minimal social security contributions over the years through the self-employment tax because their net self-employment income (after business expenses) is so low.
I’ve been thinking I should experiment with a private retirement savings match program — a modestly sized match — to help bring notice to the Saver’s Credit and encourage people to take advantage of it. I don’t think it would take much to get people’s attention and make them realize that the Saver’s Credit is a great opportunity if they qualify and can afford to put something away, even a small amount. The credit is only for people who would otherwise owe income taxes, so the lowest income people (who don’t end up owing any income tax) wouldn’t get to use the credit.
Here’s the extent of my research: I did a very unscientific analysis of the 2007 tax returns of 11 artists I’ve worked with. Four of them didn’t owe any income tax for 2007 — they only owed self-employment tax, and the Saver’s Credit in its current form can’t be counted against self-employment tax — so they wouldn’t have been eligible for the Saver’s Credit. And one of the eleven artists earned a bit too much to qualify. But the other six owed some federal income tax and were below the maximum income levels for the Saver’s Credit, thus making them eligible for the credit.
Two of those six claimed the maximum credit for which they were eligible (one was in the 50% credit bracket but only owed $40 in income tax so only received a $40 credit for a roughly $1,000 IRA contribution, and the other was in the 10% credit bracket and received a $200 credit for a $3,000 IRA contribution because an individual will only receive the credit for up to $2,000 in annual retirement contributions).
Of the other four who were eligible but didn’t make any retirement contributions, two of them would have been in the 10% bracket (both earned just a bit too much to qualify for the 20% credit bracket), and thus they could have received up to $200 each for retirement savings of at least $2,000 each for the year. One of the four would have been in the 20% bracket and could have received $400 for retirement savings of $2,000. The fourth would have been in the 50% credit bracket, owed roughly $350 of federal income tax, and thus could have received a credit of $350 for retirement savings of $700.
So six of the 11 artists in my little analysis were eligible for some sort of credit, of which only two of them actually made contributions to tax-advantaged retirement plans, earning a tax credit. The other four left some money on the table, so to speak, by not making retirement contributions.
I’m not surprised. A potential match of a few hundred dollars (especially if it might require locking up a couple thousand dollars in a retirement plan) just may not be so attractive if you’re barely getting by anyway. And they may be making very logical decisions to set aside any available money to invest in their business or in an emergency fund or in plans for a future home purchase rather than a retirement plan.
But still, they probably haven’t carefully weighed exactly what tax credit match they might get from a retirement contribution. I bet they would give it some thought, however, if they heard about a private program to provide some match for the retirement savings for low-to moderate-income people. A tax credit that only offsets a tax liability you would otherwise incur just doesn’t feel the same as real money.
I suspect that if a reasonably well-marketed program could offer even just a couple hundred dollars of private match to go into the retirement account of someone who’s also eligible for the Saver’s Credit, the targeted publicity and the combined benefit would encourage some people to put money away for retirement who wouldn’t otherwise do so. And it might get them in the habit of saving so they could be in a position to claim the Saver’s Credit in future years as well, or draw on the retirement funds for a qualified investment like a first home or post-secondary education if either of those becomes a higher priority.
I’m going to see if I can scrounge up a few thousand dollars to try this as a pilot program for 15 or 20 artists in the Berkshires during the 2009 tax season. I’d be very interested to see what sort of demand it might generate.