Encore: A refundable Saver’s Credit makes Secure 2.0 worth it

by | Jan 24, 2023 | Stock Market

The inclusion of the new Saver’s Credit in the Secure 2.0 Act provides some balance to a piece of legislation that previously had primarily provided extensive goodies to high earners in the form of delayed required minimum distributions, provisions for catch-up contributions, and more.  Read: I’m about to get $130,000 from a lump-sum pension payout, but I don’t know what to do with it

Despite my enthusiasm for the new credit, I do have some questions about the mechanics.  A saver’s credit designed to help lower and middle-income Americans save for retirement has been on the books for some time. Under current law, depending on adjusted gross income (AGI), a household can claim a credit for 50%, 20%, or 10% of the first $2,000 contributed during the year to a retirement account (see Table 1).  

In theory, workers could gain a lot from the Saver’s Credit. A married couple with combined income of $43,500 who each contribute $2,000 to his/her retirement plan are eligible for a $1,000 credit each, for a total of $2,000. That is, they pay $2,000 less in federal income taxes than they would have otherwise.  Read: People who work for a small business now have a better shot at retirement security In practice, the Saver’s Credit does not work so smoothly. First, the credit is nonrefundable, which means that it can reduce the required tax repayment to zero but not below. So, if the couple had a tax liability of only $750, their credit would be limited to that amount. Second, because of interaction with the Child Care Credit, the Saver’s Credit is often not usable for taxpayers with children. Finally, the design is a little crazy. As couples move from an AGI of $43,500 to $43,501, their credit rate drops from 50% to 20%. Finally, many people do not know about the Saver’s Credit.  Read: Are you ready for the next emergency? Take these steps to prepare. Secure 2.0 dramatically changes the Saver’s Credit. 
First, it creates one credit rate of 50%, as opposed to the tiered percentages as income rises, which—at a minimum—makes the credit less complicated and confusing.

Second, it makes the Saver’s Credit refundable. That is, it changes it from a credit used to reduce a tax liability to a government ma …

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