There may soon be a new incentive for low- and middle-income folks to save for retirement. Under a provision in a legislative plan known as “Secure 2.0” — which is part of an omnibus appropriations package that passed the Senate on Thursday and awaiting a vote in the House — a retirement “saver’s match” would be introduced, thereby altering how a current tax credit operates.
Beginning in 2027, if the measure passes, low-income individuals who contribute to a qualifying retirement account — such as a 401(k) plan — would get a restricted federal “matching” contribution. This amount would be capped at 50% of up to $2,000 in contributions to an eligible account or $1,000 per individual.
Between $41,000 and $71,000, the match would be tapered down for married couples filing a joint tax return. The phase-out range would be $20,500 to $35,500 for single taxpayers and $30,750 to $53,250 for heads of household.
The existing credit is not always advantageous for taxpayers.
The present tax credit is nonrefundable, meaning that you do not receive the credit if you have no federal income tax liability. According to Shai Akabas, director of economic policy at the Bipartisan Policy Center, the biggest disadvantage of the current law is that it is not refundable.
Therefore, persons with no federal income tax burden, which includes the majority of low- and moderate-income earners, receive no advantage from this credit, Akabas explained. This change attempts to ensure that these individuals receive an incentive and a reward for saving for the future.
Kristen Carlisle, general manager of Betterment at Work, stated that the new saver’s match would be offered to workers who are not eligible to use the present tax credit, such as some government employees (e.g., school teachers) and gig workers.
Carlisle stated that the match would be a direct, meaningful approach to improve the retirement savings of low- and middle-income employees and encourage healthy retirement planning behaviors.”
According to the American Retirement Association, over 108 million individuals would be eligible for the saver’s match.
The existing tax benefit remains accessible.
Meanwhile, the present tax credit remains accessible and will continue until 2026 if the Secure 2.0 provision becomes law. However, according to a 2021 analysis from the Transamerica Center for Retirement Studies, only 48% of workers know this.
In 2022, the maximum amount of the existing tax credit is $1,000 (50% of $2,000 in contributions) for single filers with a maximum income of $20,500 and heads of households with a maximum income of $30,750. The maximum credit for joint filers is $2,000 (50% of $4,000 in contributions) for persons with incomes up to $41,000.
The credit phases down — is decreased to either 20% or 10% from 50% — up to incomes of $34,000 (singles), $68,000 (joint filers), and $51,000 (heads of household) (heads of household).