Big Changes to the Saver's Credit Could Be on the Way

Congress is considering legislation that would turn the Saver's Credit into a government match to your retirement plan contributions.

picture of the Capitol Dome with money in the background
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The Saver's Credit helps lower- and middle-income Americans who contribute to a retirement plan by cutting up to $1,000 ($2,000 for married couples) off their tax bill when they file their annual tax return. It's also a particularly good incentive to get young people started early on saving for their golden years.

But the Saver's Credit as it exists today could be in for some significant changes – particularly with respect to how it's paid. The EARN Act, which was recently introduced in the U.S. Senate, would basically convert the credit into a government matching program for retirement plan contributions. Other revisions would be made, too. If passed, the new rules would take effect in 2027.

While it's too early to tell if the proposed changes will eventually be enacted into law, there is bipartisan support for major improvements to current retirement saving plans and incentives. So, depending on how the politics play out, there's a decent chance that we'll see improvements to the Saver's Credit in one form or another in the near future – and they very well could be the modifications included in the EARN Act.

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The Current Saver's Credit

Currently, qualified taxpayers who contribute to a retirement plan (e.g., a 401(k), traditional IRA or Roth IRA) can claim the Saver's Credit on their tax return. For 2022, single filers and married couples filing a separate return with adjusted gross income of $34,000 or less are eligible for the credit. Married people filing a joint tax return must have an AGI of $68,000 or less, while head-of-household filers must have an AGI of $51,000 or less to qualify. However, even if your income is below the applicable limit, you won't qualify for the credit if you're under 18 years of age, a full-time student, or can be claimed as a dependent on someone else's tax return.

If you satisfy the eligibility requirements, the credit amount is either 10%, 20% or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts. The percentage used is based on your income and filing status. The credit is a "nonrefundable" credit, which means it can't be larger than your overall tax liability before the credit is applied (so your credit could be reduced if your tax bill is low).

Contributions to an ABLE account also qualify for the Saver's Credit if they're from the designated beneficiary (although this rule is set to expire after 2026).

For more information on the current credit, see Saver's Credit: A Retirement Tax Break for the Middle Class.

EARN Act Changes to the Saver's Credit

The EARN Act would make a number of important revisions to the Saver's Credit starting in 2027. First and foremost, it would change the way you get the credit. Instead of having the credit applied against your tax liability when you file your tax return, the credit amount would actually be deposited directly into your retirement account. You'd get to pick which retirement account it goes into, but it couldn't go into a Roth account. If your credit is less than $100, you would still be able to apply it against your tax liability instead of having it deposited into a retirement account. Plus, the amount deposited into your account wouldn't count towards your annual contribution limit. The hope is that this change would make it easier to save for retirement by actually putting more money into retirement accounts automatically.

The credit would also become a refundable credit under the EARN Act. As such, you would not lose part of your credit if your tax liability were less than the credit amount.

The phase-out ranges would be adjusted and expanded, too. This would allow more people to claim the Saver's Credit. For single filers and married people filing separate returns, the credit would be gradually reduced to zero if modified AGI is from $20,500 to $35,500. Joint filers would have their credit reduced if their modified AGI is between $41,000 and $71,000, and head-of-household filers would see a reduction if their modified AGI is $30,750 to $53,250. These figures would be adjusted annually for inflation starting in 2028 (as the current phase-out ranges are adjusted each year). Deductions and exclusions allowed for any retirement savings contribution during the year wouldn't be included in modified AGI (this would be a new provision).

Eligibility for the Saver's Credit would also be affected. Under the EARN Act, nonresident aliens would not qualify unless they were treated as a U.S. resident for the tax year. Generally, a "nonresident alien" is not a U.S. citizen, doesn't have a green card, and is not physically present in the U.S. for the required amount of time.

Saver's Credit payments made under the EARN Act wouldn't be subject to reduction or offset to pay child support, federal taxes, state income taxes, debts owed to federal agencies, or unemployment compensation debts.

If the IRS deposits money into your retirement account by mistake, the erroneous payment would be treated as an underpayment of tax that you would have to repay. However, if you take the money out of the account in a timely manner, you won't be hit with the 10% penalty for early withdraws from a retirement account (i.e., for taking money out before you're 59½ years old).

EARN Act's Path to Passage

Major legislation on retirement savings was passed in 2019 with the SECURE Act. However, since then, several key lawmakers on both side of the aisle in Congress have not been satisfied. As a result, there's been a push this year to get another bill to the president's desk that will make it easier for people to build a nest egg for retirement.

Earlier this year, the U.S. House of Representatives passed the SECURE Act 2.0, which is another big bill addressing retirement saving issues. That legislation would also impact the Saver's Credit by applying a single credit percentage (50%) across the board, but it would also make the credit available to fewer people.

Obviously, both the SECURE Act 2.0 and the EARN Act won't be passed by Congress. So, lawmakers still have a lot of work to do before any major retirement legislation can be passed. But many experts believe that a large retirement bill of some sort will be enacted soon – perhaps by the end of the year. However, if those experts are correct, we don't know yet if it will be the EARN Act, the SECURE Act 2.0, or perhaps a combination of the two that gets to the finish line.

Rocky Mengle
Senior Tax Editor,

Rocky is a Senior Tax Editor for Kiplinger with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, he worked for Wolters Kluwer Tax & Accounting and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.