SECURE 2.0 Upgrades Saver’s Credit to a Valuable Match

by Prof. Robert Bloink and Prof. William H. Byrnes

The SECURE Act 2.0 made significant changes to the retirement planning landscape. 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, it’s value has also always 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. For many lower-income taxpayers, those direct retirement savings could be a game changer going forward.

SECURE 2.0 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 percent 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 (the credit could be limited to 10 percent or 20 percent of income for taxpayers who exceed the base income threshold amount).

The existing saver’s credit will be replaced by a 50 percent 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 IRAs). That matching contribution will thus be limited to $1,000 per taxpayer ($2,000 per married couple). However, the 50 percent 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 (regulations governing the phase out have yet to be released). The phaseout will begin at $20,500 for individuals and $41,000 for married couples. Once an individual’s 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).

Taxpayers will be entitled to choose where their saver’s match is deposited. Taxpayers who make contributions of less than $100 will have their match applied to lower their tax liability instead of being deposited into their retirement account.

Taxpayers who contribute to Roth retirement accounts can qualify for the saver’s match based on those contributions. However, the saver’s match itself cannot be deposited into a Roth account. In other words, the matching contributions will always be treated as pre-tax contributions that will be taxed at ordinary income tax rates when withdrawn.

The Saver’s Match Going Forward

The changes to the saver’s credit become fully effective starting in 2027. According to some, the reason for the delayed implementation is to give the government time to develop ways to educate the public about the benefits of the new saver’s credit. The SECURE Act 2.0 itself requires the Treasury Department to increase awareness by developing both print and digital materials about the match (including for state-sponsored retirement programs) and translating those materials into at least ten languages.

Currently, the law does not actually require retirement plans to accept the saver’s match. Taxpayers should also be given access to information about whether their plan will accept the match. When plans refuse to allow the saver’s match, the taxpayer must open their own traditional IRA to benefit from the match.

The government is now tasked with building a streamlined application process that will allow taxpayers to easily apply for the saver’s match. It’s also expected that there will be an option for taxpayers who are not required to file a federal tax return.

Taxpayers should also understand that they could be subject to penalties for early withdrawals. Even with the newly expanded hardship distribution rules, penalties could create problems for taxpayers who need to access their retirement funds for emergencies.

Conclusion

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.

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