Someday, Over the Rainbow: a Hot Take on SECURE 2.0 and the Saver’s Match
This is Part 2 in a series covering key elements of SECURE 2.0, as memorialized into law as part of the 2023 Appropriations Act (Division T) on December 29, 2022. We were still crying over our canceled flights, but it gave us plenty of time to read the Act.
In Division T alone we counted more than 40 new retirement-related provisions. We focused first on Automatic Enrollment, because it’s so impactful and we love it. This week we’ll hit the key features of the Saver’s Match – what qualifies, who gets the money, when, and where.
Saver’s Match: a few notes.
We’ll make a couple of quick notes right out of the gate. First, the name. Today we have what is called a Retirement Savings Contributions Credit (Saver’s Credit). The new provision under SECURE 2.0 is instead called a Saver’s Match.
The existing Saver’s Credit is essentially a tax credit claimed at the time of filing using Form 8880. If you claim qualifying contributions, you essentially get a credit against taxes you would otherwise owe; your tax liability goes down.
There are a lot of reasons why this credit has been discredited, if you will. Most importantly, it doesn’t do a good job of getting real financial support into the hands of the low-income savers at which it is aimed. You have to owe taxes. You have to file taxes. The funds are a sort of “invisible benefit” occurring once a year for the savings “pain” the low-income family has experienced throughout the year. And the savings aren’t refundable so they don’t go into an account where they would naturally be retained.
We like the new refundable credit, and its Match concept, better.
Two more notes. The new Saver’s Match provision is not effective until tax years starting January 1, 2027. Meaning no actual matching funds will be flowing to savers until 2028, five years from now. The good news is that gives the Treasury and the financial services infrastructure community plenty of time to figure out how to send and receive matching funds. The bad news is that five years is a long time. Some days it feels like anything can happen in a five-year period.
But assuming all goes to plan, here’s what we know.
What it means in real life.
The new Savings Match makes the intended credit available to a much larger swath of working Americans, including those in families whose incomes are low enough that they are not required to file taxes. It also refunds the credit directly into retirement savings accounts. This alone should significantly shift the amount of the credit that is retained in the form of retirement savings toward retirement income replacement.
Are there concerns with the credit? Absolutely, yes. We can think of a few:
Five years seems like an eternity in legislative time – some wonder whether this law will still be in place when the crediting period arrives in 2028.
How will matching funds work in real life – the Treasury needs to devise ways to correctly identify eligible taxpayers and send their credits to the correct accounts – and receiving Plan and Account service providers – think recordkeepers – need to devise ways to correctly receive, process, credit and invest these matching contributions.
And then there is the human element – even if there are penalties in place for early withdrawal of matching funds, will savers be tempted to access them – triggering downstream taxes and penalties due? We are sure the answer is yes, some will.
In whole, however, this looks like a significant improvement to support for low-income savers who are able to contribute as much as $2,000 to their retirement accounts each year.
Watch this space for more details on how this provision comes to life.
Retirement security matters! / Lisa
This piece was written by Lisa Massena and the views expressed are her own. You can get your own copy of the Secure 2.0 Act as included in the 2023 Appropriations Bill here.
This piece was also featured in the January 26, 2023, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
