Significant Changes To The Saver’s Credit May Be On The Way

Congress is considering legislation that would turn the Saver’s Credit into a government matching program for retirement plan contributions.

The Saver’s Credit assists lower- and middle-income Americans who contribute to a retirement plan by reducing their tax bill by up to $1,000 ($2,000 for married couples) on their annual tax return. Additionally, it’s an excellent way to start young people saving for their retirement.

However, the Saver’s Credit as it currently stands may undergo major modifications, notably in how it is paid. The EARN Act, recently proposed in the United States Senate, would turn the credit into a government matching program for retirement plan contributions. Other changes would be made as well. If approved, the new restrictions would go into effect in 2027.

Even though it is too early to tell whether the proposed reforms will become law, there is bipartisan support for significant enhancements to the present retirement saving systems and incentives. So, depending on how the politics play out, there’s a good likelihood that we’ll see improvements to the Saver’s Credit in some form or another in the near future – and they might very well be included in the EARN Act.

The Credit for Current Savers

Qualified taxpayers who contribute to a retirement plan (such as a 401(k), regular IRA, or Roth IRA) can now claim the Saver’s Credit on their tax return. For 2022, the credit is available to single filers and married couples filing separate returns with an adjusted gross income of $34,000 or less. To qualify, married couples filing a joint tax return must have an AGI of $68,000 or less, and head-of-household filers must have an AGI of $51,000 or less. If you are a full-time student, under 18, or you’re claimed as a dependent on another person’s tax return, you won’t qualify for the credit.

Depending on your eligibility, you can earn a credit of 10%, 20%, or 50% of the first $2,000 ($4,000 for joint filers) you deposit to a retirement account. The proportion applied is determined by your income and filing status. The credit is “nonrefundable,” which means it cannot exceed your total tax due before the credit is applied (so your credit could be reduced if your tax bill is low).

If made by the designated beneficiary, contributions to an ABLE account are also eligible for the Saver’s Credit (although this rule is set to expire after 2026).

Changes to the Saver’s Credit Under the EARN Act

Beginning in 2027, the EARN Act would make several significant changes to the Saver’s Credit. First and foremost, it would alter how you receive credit. Instead of being applied to your tax liability when you file your tax return, the credit amount will be put straight into your retirement account. You’d be able to choose whatever retirement account money went into, except for a Roth account. If your credit is less than $100, you can still apply it to your tax due rather than transferring it into a retirement account. Furthermore, the funds placed into your account will not go against your yearly contribution limit. The expectation is that this adjustment would make it easier to save for retirement by automatically depositing more money into retirement accounts.