‘Secure 2.0’ provides ‘match’ to retirement savers with lower income

A new incentive for low- and middle-income people to save for their post-retirement years may be on the way.

Under a provision included in a bill known as “Secure 2.0” — which is included in a bulk grant bill approved by the Senate on Thursday and awaiting a vote in the House of Representatives — a “savers match” for retirement would be introduced , which essentially changes the way an existing tax credit works.

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Should the law pass, individuals with incomes below set limits who contribute to a qualifying retirement account — i.e., a 401(k) plan — would receive a limited “equal” federal contribution to their nest egg starting in 2027. This amount would be a maximum of 50% of up to $2,000 in contributions to a qualifying account (i.e. a maximum of $1,000 per person).

The match would be phased out (reduced) at incomes of $41,000 to $71,000 for married couples filing joint tax returns. For single taxpayers, the phase-out range would be $20,500 to $35,500 and for heads of household $30,750 to $53,250.

The move to allow a federal contribution is sought because the current tax credit is non-refundable, meaning you won’t receive the credit if you don’t owe federal income tax.

“The biggest downside to today’s version of the law is that it is non-refundable,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

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“People who are not subject to federal income tax, which are most low- and middle-income earners, do not benefit from this credit,” Akabas said. “This reform is an attempt to ensure that these people have an incentive and a benefit when they save money for their future.”

The new austerity package would also be available to some workers who aren’t allowed to use the current tax credit, such as some government employees (e.g. school teachers) and gig workers, said Kristen Carlisle, general manager of Betterment at Work.

The match would be “a direct, substantive way to increase retirement savings for low- and middle-income workers and incentivize good retirement habits,” Carlisle said.

More than 108 million people would be eligible for the savings match, according to the American Retirement Association.

In the meantime, the existing tax credit remains available and would remain intact until 2026 when the provision in Secure 2.0 becomes law. However, according to a 2021 report by the Transamerica Center for Retirement Studies, only 48% of workers are aware.

The current tax credit can be a maximum of $1,000 (50% of $2,000 in contributions) for single taxpayers with income up to $20,500 in 2022 and heads of household with income up to $30,750. For joint applicants, the maximum credit is $2,000 (50% of $4,000 in contributions) for those earning up to $41,000.

Above these income limits, the credit is phased out – reduced from 50% to 20% or 10% – up to an income of $34,000 (singles), $68,000 (joint pensioners) and $51,000 (heads of household).