Secure 2.0 will provide limited federal “matching” on the contributions of low-income retirement savers

A new incentive for low- and middle-income individuals to save for their years after work may be on its way.

Under a provision included in a legislative proposal known as “Secure 2.0” — which was included in the sweeping appropriations bill that passed the Senate Thursday and awaited a House vote — “save matching” will be implemented for retirement, essentially changing the current way credit works. tax.

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If the bill passes, people with incomes subject to certain limits who contribute to a qualified retirement account—that is, a 401(k) plan—would get a limited federal “matching” contribution to their nest egg starting in 2027. That amount would amount to a maximum of $50. % of contributions up to $2,000 in an eligible account (so max $1,000 matching per individual).

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

This step is being sought to allow for a federal matching contribution because the existing tax credit is non-refundable, which means that if you don’t owe federal income tax, you won’t get the credit.

“The main flaw with the legal version today is that it is not refundable,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

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“So individuals who do not have a federal income tax obligation, who are low- and middle-income earners, do not benefit from this credit,” Akabas said. “This reform is an effort to make sure that these people get incentive and benefits to set aside money for their future.”

Christine Carlisle, general manager of Betterment at Work, said the new saver match will also be available to some workers who aren’t allowed to use the existing tax credit, such as some government employees (for example, school teachers) and laborers.

The match will be “a direct and substantial way to increase retirement savings for low- and middle-income workers, and stimulate good retirement planning habits,” Carlyle said.

More than 108 million people will be eligible for Saver Match, according to the American Retirement Association.

In the meantime, the existing tax credit remains available and will remain until 2026 if the provision in Secure 2.0 becomes law. However, only 48% of workers know this, according to a 2021 report from the Transamerica Center for Retirement Studies.

The current tax credit can be up to $1,000 (50% of $2,000 in contributions) for single tax filers with incomes up to $20,500 in 2022 and heads of households with incomes up to $30,750. For joint filers, the credit limit is $2,000 (50% of contributions $4,000) for those with incomes up to $41,000.

Above these income limits, the credit is phased out—reduced to 20% or 10% of 50%—up to incomes of $34,000 (single), $68,000 (joint), and $51,000 (head of household).