Tax Saver's Credit can boost retirement plan participation

Congress wants to pay employees to save for retirement. As part of the SECURE 2.0 Act that went into effect in late 2022, certain employees will receive a tax credit based on the amount of their retirement plan contribution. This credit can also help employers and plan sponsors increase plan participation and participant contribution rates among those employees who typically do not contribute to their retirement.

Here is a quick rundown of the key components of the Tax Saver's Credit.

Who is eligible?

An employee is eligible if they meet the following three conditions:

1. Aged 18 or older,
2. Not claimed as a dependent on another person's return, and
3. Not a student.

The IRS considers an employee a student if the employee was enrolled as a full-time student at a school or took a full-time, on-farm training course given by a school or a state, country, or local government agency for any part of five (5) calendar months of the tax year. A school includes technical, trade, and mechanical schools but does not include on-the-job training courses, correspondence schools, or internet-only schools.

What contributions are eligible?

Eligible contributions include those made in the following types of plans:

• 401(k), 401(b), governmental 457(b),
• Thrift Savings or 403(b),
• Traditional or Roth IRA,
• SARSEP or SIMPLE,
• 501(c)(18)(D), or
• ABLE account for which the employee is designated beneficiary

Rollover contributions and employer match amounts are not eligible for the credit. Additionally, recent distributions from these plans may reduce the eligible contribution amount.

What is the benefit for employees?

Employees may receive a tax credit of up to $2,000 ($1,000 if not married filing jointly). The table below determines the tax credit based on the employee's Adjusted Gross Income (AGI) and filing status:

Credit rate	Married filing jointly	Head of household	All other filers*
50% of your contribution	AGI not more than $43,500	AGI not more than $32,625	AGI not more than $21,750
20% of your contribution	$43,501 - $47,500	$32,626 - $35,625	$21,751 - $23,750
10% of your contribution	$47,501 - $73,000	$35,626 - $54,750	$23,751 - $36,500
0% of your contribution	More than $73,000	More than $54,750	More than $36,500

For example, let's consider Allen, who:

• Has an AGI of $43,000,
• Files as married filing jointly, and
• Contributes $5,000 to his 401(k) plan in the tax year.

Allen would be eligible for the 50% tax credit rate. Since he contributed $5,000 to his retirement plan, he would be eligible for a $2,500 credit. However, the credit is capped at $2,000 for married filing jointly filers. So, Allen would receive a $2,000 tax credit. A tax credit reduces the amount of tax liability a taxpayer has. So, Allen would see his tax bill go down by $2,000.

In summary

By contributing to their retirement plan, certain employees not only start saving for retirement but also get to reduce their tax liability. Factor in other advantages associated with certain retirement plans like tax-deferred growth, pre-tax contributions, employer match, etc., and it becomes easier for plan sponsors and employers to increase plan participation for employees who may otherwise never start saving.

If you have questions about your retirement plan, educating employees about this credit or other benefits of your retirement plan, or want to assess your situation, contact Bob Frey using the information below.