TheStreet: Saver’s Credit: How a SECURE Act 1.0 Provision & 2.0 Proposal Impacts Retirement Benefits
Author: Siân Killingsworth / 8 Nov 2022
by Chad Parks for TheStreet, November 8, 2022
In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was passed, marking a historical step in the right direction for Americans dreaming of a fairytale retirement. The bill covered a lot of ground with key provisions aimed at increasing access to workplace retirement plans and stopping older generations from outliving their savings. One major provision of the bill that’s often overlooked by the average individual is the Saver’s Credit.
The Saver’s Credit
This is a tax credit for low- and middle-income individuals and families that provides incentives for retirement contributions. To be eligible for the credit, an individual must not be claimed as a dependent, not be a student, and must be 18+ years old. Savers within those parameters can receive up to 50% of their eligible retirement plan contributions each year of up to $2,000 per individual, or $4,000 for those married-filing-jointly, making the maximum tax credit available $1,000 per individual or $2,000 for those married-filing-jointly.
As it stands, as a saver’s income grows, the size of the credit they’re eligible for shrinks to 20% or 10% of their contributions, depending on their adjusted gross income (AGI). In 2022, single filers’ AGI must fall below $34,000, and for married-filing-jointly, the AGI must be below $68,000.
This provision in the SECURE Act is a momentous step in the right direction toward solving America’s looming retirement crisis — defined as the crumbling three-legged stool of underfunded pension plans, historically low personal savings, and the Social Security surplus reserves running dry. Now more than ever, individuals’ retirement futures fall squarely on their ability to save enough money to support themselves, which is getting increasingly harder to do with progressively longer life expectancies.
By expanding Americans’ saving power with the SECURE Act’s Saver’s Credit, we’re one step closer to helping everyone reach their retirement goals, though it isn’t an end-all solution to the problem.
SECURE Act 2.0
In October 2020, the House Ways and Means Committee proposed an extension of the SECURE Act with the Securing a Strong Retirement Act, dubbed SECURE Act 2.0. Where it currently stands, the bill has been signed into law by both the House of Representatives and the Senate, and is making its way to the Executive Branch in the coming months.
Among many important proposals is an extension to the Saver’s Credit that helps generate even more money back to individuals contributing to their retirement plans, further incentivizing participation. Under SECURE Act 2.0, the credit is fixed at 50% for all eligible savers, instead of declining as income increases. Further, the qualifying income cutoff is expanded — single filers eligible AGI increases to $41,500 or less, and joint filers AGI increases to $83,000 or less, starting after the 2026 tax year.
Expanding access to individuals eligible for the credit is another monumental step in solving the looming retirement crisis and is one of many provisions aimed toward increasing retirement savings access across the country — But why is the government finally stepping in and taking action against retirement insecurity?
One major factor at hand is the influx of Americans reaching retirement age. It’s estimated that 76 million baby boomers will retire in the coming years, if they haven’t already, meaning more individuals will rely on underfunded pensions, low personal savings, and a depleted Social Security system.
America is facing a scary reality of retirement insecurity, forcing the government to get involved at the federal level with bills like SECURE Act and SECURE Act 2.0, as well as at the state level with the rollout of state-mandated retirement plans picking up steam across the country.
Other notable proposed provisions
Aside from the Saver’s Credit, SECURE Act 2.0 has a number of proposals that increase access to retirement vehicles for individuals, including:
- Retirement plans startup costs tax credit: Currently, eligible employers can receive a tax credit of up to 50% of retirement plan startup costs, up to $5,000, for three years. SECURE Act 2.0 proposes to double the tax credit with 100% of startup costs covered to further take the burden off small business owners and encourage more workplace retirement plan access.
- Increased auto-enrollment: SECURE Act 2.0 proposes all employers auto-enroll new employees into their standing 401(k) and 403(b) plans at a 3% contribution rate, which increases 1% annually until it hits a 10% contribution rate unless employees opt out. The reason being, employees are more likely to participate if the work is automatically done for them.
- Delayed required minimum distributions (RMDs): The 2019 SECURE Act delayed the starting RMD age from 70½ to 72. The new proposal takes it a step further with a plan to gradually delay the RMD age again to 73 in 2022, 74 by 2029, and 75 by 2032. This provision helps near-retirees grow their nest egg for a few more years to maximize return and account for later retirement and longer life spans.
The SECURE Act 2.0 updates to the Saver’s Credit are another step in the right direction in ensuring Americans’ retirement security, but still not enough to solve the crisis at hand. To make the greatest impact, we must continue to make small steps and draw attention to the situation by calling for change.
About the author: Chad Parks
Chad Parks is the founder and CEO of Ubiquity Retirement + Savings, a leading financial technology company that pioneered transparent, flat-fee retirement plans for the historically underserved small business market. Since 1999, the firm has helped more than 10,000 businesses contribute over $3 billion toward retirement savings. Chad started his career as a financial advisor and has more than 26 years of experience in the industry.