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Financial Planning > Tax Planning > Tax Deductions

Debate: Do Taxpayers Benefit From Changes to the Saver’s Credit?

By Robert Bloink By William H. Byrnes

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The Secure 2.0 Act made significant changes to the current saver’s credit, which provides a nonrefundable tax credit for certain lower-income taxpayers who make contributions to their tax-preferred retirement plans. 

Starting in 2027, the existing saver’s credit will be replaced by a 50% matching contribution from the federal government, deposited into existing 401(k)s and IRAs. That match will be limited to $2,000 and will also be phased out based on income levels similar to those that apply to determine qualification for the existing tax credit.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the changes to the saver’s credit.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

thumbs up Bloink
Byrnes

Their Reasons:

Bloink: The new matching replacement will provide a much stronger incentive for taxpayers to save for retirement. Rather than having to wait for a tax credit that can only offset existing tax liability, retirement savers will receive a retirement plan contribution regardless of whether they owe taxes at all.

This new match will go a long way toward encouraging a broader group of Americans to save for retirement. 

Byrnes: Sure, the saver’s “match” may be more valuable than the previous credit, but are taxpayers going to be able to take advantage of it? Employer-based plans don’t have to accept these government matches — and the amounts can’t be treated as Roth contributions.

Taxpayers who only have an employment-based account or a Roth will have to set up a new account to receive these contributions. What happens to the match if they don’t set up an acceptable or eligible account? 

Bloink: While tax credits can provide powerful incentives on many fronts, the saver’s credit is geared toward the lowest-income taxpayers. Many of these individuals don’t owe anything in taxes and thus couldn’t benefit from the old saver’s credit at all.

Realistically, that often rendered the old saver’s credit worthless as a tool to motivate lower-income taxpayers to contribute to tax-preferred retirement accounts.

Byrnes: The administrative burdens alone are going to be extremely difficult for the government to overcome. The federal government will have to keep track of millions of retirement account contributions — and will also have to confirm the accounts into which they were deposited and then determine whether that account can accept the matching contribution.

We also have to consider the possibility that taxpayers could move their retirement funds between the date they report the contribution to the government and the date the government inevitably makes the matching contribution.

Bloink: Sure, administrative issues are going to exist when we’re talking about any new system. That doesn’t mean a new system won’t succeed. We have to consider the benefits. With the modifications to the saver’s credit, the potential benefits far outweigh the burdens.

We should also remember that the government is committed to modernizing its approach to administration and recordkeeping — even at the IRS level.

With proper funding, the administrative issues can be addressed so that the saver’s match can provide its intended benefits to lower-income taxpayers — and the new system doesn’t even become effective until 2027, providing ample time to work out the problems.

Byrnes: Yet another problem is that taxpayers are subject to a claw-back if they take distributions from their accounts after reporting contributions for saver’s match purposes. We haven’t seen any guidance on how the government will handle these situations, especially for taxpayers who don’t have existing tax liability or even filing obligations in some cases.

We have to consider the group of lower-income taxpayers that will be eligible for this match – and we should assume that these challenges will be fairly common and will inevitably make the new saver’s match less valuable than the old saver’s credit.

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Robert Bloink

William H. Byrnes

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