Retirement Saver's Tax Credit Converted to "Saver's Match"

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published 23 December 2022

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 is in for some significant changes – particularly with respect to how it's paid. The SECURE 2.0 Act of 2022, which was signed into law by President Biden on December 29, converts the credit into a government matching program for retirement plan contributions dubbed the "Saver's Match."

The new Saver's Match isn't effective until 2027, so the existing tax credit will still be around for a few more years. But if you'll still be saving for retirement after 2026, the smart move is to become familiar with the new tax break now so you can hit the ground running in 2027.

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Currently, qualified taxpayers who contribute to a retirement plan (e.g., a 401(k), traditional IRA or Roth IRA) can claim the Saver's Tax Credit on their tax return. For 2022, single filers and married couples filing a separate return with adjusted gross income (AGI) of $34,000 or less are eligible for the credit ($36,500 for 2023). Married people filing a joint tax return must have an AGI of $68,000 or less ($73,000 for 2023), while head-of-household filers must have an AGI of $51,000 or less to qualify ($54,750 for 2023). 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).

The SECURE 2.0 Act makes a number of important revisions to the Saver's Credit starting in 2027. First and foremost, it changes the way you get the credit. Instead of having the credit applied against your tax liability when you file your tax return, the federal government will deposit a "matching contribution" directly into your retirement account. You'll get to pick which eligible retirement account it goes into, but it can't go into a Roth account. In addition, if you so elect or your matching contribution is less than $100, the match will be applied against your tax liability (as it is for the current tax credit) instead of deposited into a retirement account. Plus, the amount deposited into your account won't count towards your annual contribution limit. The hope is that this change will make it easier to save for retirement by actually putting more money into retirement accounts automatically.

The matching contribution will equal 50% of the first $2,000 contributed to eligible retirement accounts. Unlike the current Saver's Credit, the percentage won't change because of your income or filing status. The match (or credit if the match is applied against your tax liability) will also be "refundable" after 2026. As a result, you won't lose part of the matching funds if your tax liability is less than the amount of the match allowed.

Starting in 2027, the phase-out ranges are adjusted and expanded, too. This will allow more people to claim the Saver's Match. For single filers and married people filing separate returns, the match will be gradually reduced to zero if modified AGI is from $20,500 to $35,500. Joint filers will have their match reduced if their modified AGI is between $41,000 and $71,000, and head-of-household filers will see a reduction if their modified AGI is $30,750 to $53,250. These figures will be adjusted annually for inflation starting in 2028 (as the phase-out ranges for the current credit are adjusted each year). Deductions and exclusions allowed for any retirement savings contribution during the year won't be included in modified AGI (this is a new provision).

Eligibility for the Saver's Match would also be affected. Under the SECURE 2.0 Act, nonresident aliens don't qualify unless they are 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. As with the current Saver's Credit, taxpayers under 18 years of age, full-time students, and anyone claimed as a dependent on someone else's tax return aren't eligible, either.

Rocky Mengle was a Senior Tax Editor for Kiplinger from October 2018 to January 2023 with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, Rocky 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 holds a law degree from the University of Connecticut and a B.A. in History from Salisbury University.