A little-used tax credit for low- and middle-income retirement savers may finally get the takeup policymakers have long desired, thanks to a major makeover under the Secure 2.0 Act.
As part of the legislation signed into law on Dec. 29, lawmakers revamped the clunky "saver's credit" and refashioned it into a "saver's match."
Beginning in 2027, low- and middle-income workers who contribute to a workplace retirement savings plan or individual retirement account will be eligible for a 50% match on up to $2,000 they put into their accounts, courtesy of the federal government.
For individuals making less than $20,500, that translates into $1,000 if they manage to set aside $2,000. For couples earning less than $41,000, the match can go as high as $2,000 if they put $4,000 in. The matches will be deposited directly into their retirement accounts.
"It's going to make a massive difference," said Nevin Adams, head of retirement research and chief content officer at the American Retirement Association in Arlington, Va., of the saver's match.
The saver's match will replace the current saver's credit, which has not been widely used because it's complex, difficult to explain and largely unknown.
The mere renaming of the credit as a match will make it much easier for workers to grasp, said Catherine Collinson, the Los Angeles-based CEO and president of Transamerica Institute, a non-profit private foundation that includes the Transamerica Center for Retirement Studies.
"The term 'match' is widely known among workers in the U.S., so that will help it resonate," she said.
The tepid uptake of the current tax credit is also due to the fact that it is non-refundable, meaning it is applied to the taxes that savers owe. In other words, low- and middle-income retirement savers who owe no tax — and there are many — receive no benefit.
"You have to have a tax obligation in order to take advantage of it," Mr. Adams said of the saver's credit.
In addition to making the credit refundable and turning it into a match, lawmakers simplified it and made it easier to understand — all in a bid to spur more low- and middle-income earners to use the incentive in its reincarnated form. The new saver's match eliminates the complex tiering of the saver's credit and replaces it with a flat 50% match that gradually phases out as a saver's income increases.