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:
- Aged 18 or older,
- Not claimed as a dependent on another person's return, and
- 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:
*Single, married filing separately, or qualifying widow(er)
||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.