Despite market crash, contribute to your 401(k) & claim the Saver’s Tax Credit

With the latest stock market dive, investors feel like the frontiersman confronting a bear in this "rough and tumble with a grizzley" illustration by H. Bullock Webster. (Image via Wikipedia Commons)

Investors are in the third week of watching in horror as their nest eggs crack. 

The fiscal horror show began with the realization on Feb. 24 that the coronavirus was a global health risk. It got worse on Black Monday March 9 in the wake of the Russia-Saudi oil price war.

Today, stocks are plunging again at rates not seen in more than a decade when were mired in the financial crisis fall-out that led to the Great Recession.

Welcome to bear territory.

That stock market grizzly is especially terrifying for those whose investments primarily are in retirement accounts.

The best advice for those still many years from retiring is to stock up on Tums and ride out this tumultuous market.

Reasons to keep saving: During the Great Recession, the average retirement portfolio took more than a 30 percent hit, but those who stuck it out saw their holdings recover and growing 10 years later. Yes, buy-and-hold still works.

That committed savings focus is critical if you hope to have the kind of retirement you want.

One of the best ways to get there is to participate in your company's workplace retirement plan. In most cases, these are defined contribution (DC) program, where the worker is responsible for saving, generally though regular automatic payroll deductions.

If you have one of these accounts, most commonly a 401(k), keep contributing. Here are three reasons, beyond just enjoying comfortable (or better) Golden Years, why:

1. With the current down market, your automatic payroll contributions are buying shares at bargain prices.
2. If you have a traditional 401(k) plan, your payroll purchase amounts are taken out before taxes are calculated, giving you a bit of an up-front tax break.
3. If you don't contribute, you'll miss out on the free money match, generally 3 percent to 6 percent of what you contribute, that your employer also makes to your account.
4. Your 401(k) contributions could make you eligible for the Saver's Credit.

Saver's Credit payoff: That fourth reason for putting money into your retirement account, even during scary financial times, is one that many taxpayers overlook.

The Saver's Credit, or the Retirement Savings Contributions Credit as it's officially titled, is a tax break that rewards low- and moderate-income individuals for adding to their nest eggs.

The best thing about this tax break is that it's a credit. That provides a dollar-for-dollar reduction in any tax you owe. In this credit's case, that could be a credit of up to $1,000.

Contributions to IRS-qualified retirement accounts count. This includes traditional and Roth IRAs, traditional and Roth 401(k)s and self-employment retirement plans.

The downside to the Saver's Credit is that it's not available to everyone who's stashing retirement dollars.

Income limits, percentage credit calculations: As mentioned earlier, it's designed to help our lower- and middle-income savers. Those earning amounts to determine eligibility for the Saver's Credit are adjusted annually for inflation.

If you're looking to claim the credit on your 2019 tax return, you cannot claim it if your income is more than:

• $64,000 for married couples filing jointly,
• $48,000 for heads of household, and
• $32,000 for singles and married filing separately filers.

The actual credit amount is determined as a percentage of your retirement contributions, again based on your income. The table below shows the credit's percentages, based on your 2019 adjusted gross income (AGI):

For the 2020 tax year, the Saver's Credit maximum earnings caps go to:

• $65,000 for married couples filing jointly,
• $48,750 for heads of household, and
• $32,500 for singles and married filing separately filers.

And here's the 2020 table and Saver's Credit percentages, based on AGI:

Hang tough despite age: And now a few words of support for older investors who are near retirement or have already stopped making the daily job trek. Things can be even scarier. I know. I'm there with you!

But as long as you've reviewed your retirement investments and have reallocated the holdings to meet your risk tolerance level, you should be OK. Again, you'll be retired for a long time.

If you need some reassurance, it might be worth talking with a financial adviser.

In the meantime, check out DoughRoller's look at how to profit from a stock market crash. And yes, one piece of advice — #1 in fact — from article author Chris Muller is max out your 401(k) right now.

You also might find these items of interest:

• 7 common 401(k) FAQs
• Tax rules on rolling over retirement accounts
• 5 things to know about workplace retirement plan hardship withdrawals

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