The Secure 2.0 Act made significant changes to the retirement planning landscape, and while some key changes became effective immediately, others are being implemented in stages.
The current saver's credit, which provides a nonrefundable tax credit for certain lower-income taxpayers who make contributions to their retirement plans, has always been valuable. However, its value has been limited for taxpayers with little to no tax liability, due to the nonrefundable nature of the credit.
Once the enhanced saver's match program becomes effective, however, all taxpayers who satisfy the income requirements will be entitled to the benefit of government-sponsored retirement contributions.
Studies show that the current saver's credit is not used by all taxpayers who qualify. The direct matching contribution is expected to reach a wider group of taxpayers — and can provide a powerful incentive for those taxpayers to proactively contribute to their own retirement savings.
Legislative Changes
Under current law, lower-income taxpayers who earn less than certain threshold amounts are entitled to a nonrefundable tax credit of up to 50% of their retirement plan contribution. The credit is based on contributions of up to $2,000 per year ($4,000 for married couples filing jointly). It also phases out depending on income and could be limited to 10% or 20% of income for taxpayers who exceed the base income threshold amount.
The existing saver's credit will be replaced by a 50% matching contribution, on up to $2,000 per taxpayer or $4,000 per couple, from the federal government; the match will be deposited into existing 401(k)s and individual retirement accounts. That matching contribution will thus be limited to $1,000 per taxpayer ($2,000 per married couple). However, the 50% match does not change based on income if the taxpayer qualifies for the match.
Additionally, the match will also be subject to a gradual phase-out based on income levels. The phase-out will begin at $20,500 for individuals and $41,000 for married couples. Once individuals' income exceeds $35,500 ($71,000 per couple), they lose eligibility for the match. The income thresholds will be adjusted annually for inflation.
Importantly, the matching contribution does not count toward the individual's base contribution limits for the year (currently, $7,000 for IRAs and $23,000 for 401(k)s).
