A program that will soon be available to increase the retirement savings of low- to middle-income earners will begin in 2027. The federal government program passed in December 2022 in the Secure Act 2.0 and will add 50 percent of the contributions made to some retirement plans.
The new program is called the Saver’s Match. Once it starts, it will replace the existing program called the Saver’s Credit. The old program gave people a tax credit, which means the credit amount was subtracted from what they owed in taxes. The Internal Revenue Service says the Saver’s Credit is given to lower-income people with individual retirement accounts (IRAs) (Roth or traditional), 401(k)s, 403(b)s, 457 plans (government), and Thrift Savings plans. You can also have a SIMPLE IRA. Rolled-over money cannot be counted as a contribution.
The Saver’s Credit program has graded benefit amounts of 10 percent, 20 percent, or 50 percent, depending on your income. The credit given would never be more than the tax you owed for the year. It means that if your credit is $800, but your tax bill is only $500, you will not pay any taxes but also will not get the difference.
The Saver’s Match Gives Money and Not Just Credit
The new program is an improvement over the old one because it will put cash directly into your retirement account. It will not matter what your tax bill is. Also, Kiplinger says the contribution will not be reduced by child support, unemployment repayment debt, or any debt you might owe to a federal agency.A penalty may be due if you take an early withdrawal (before you turn 59½) or if money is deposited into your account by mistake. If you do not withdraw the required amount, you will not face a 10 percent penalty.
The Government’s Contribution Does Not Reduce Your Contributions
A nice benefit of the Saver’s Match program is that the government’s contribution to your retirement account does not reduce the amount you or your employer can contribute. The federal government’s contribution is limited to contributions up to $2,000. When you contribute that much, the government will give you $1,000 (50 percent) directly into your retirement account.Only Some Retirement Accounts Qualify
Not every retirement account qualifies for the Saver’s Match. SmartAsset reports that Roth accounts are not qualified. The extra money will only go to accounts that accept pretax money, which helps the recipient to save even more money because they will likely be in a lower tax bracket when they retire.Qualification Limits
Since the new program intends to help low- to middle-income people save for retirement, there are income limitations. They are:- individuals earning up to $20,500
- heads of household earning up to $35,500
- married couples filing jointly earning up to $41,000
When your earnings are more than the above amounts, Finance.Yahoo says the amount given begins to phase out. If you make more than the following amounts, you do not qualify for the program:
- individuals earning up to $35,500
- heads of household earning up to $53,250
- married couples filing jointly earning up to $71,000
Advantages of the New Saver’s Match Program
The old program is still active but has some problems because it only reduced taxes, but did not encourage them to put money into a retirement account. The new Saver’s Match program is better because:- It does not affect taxes in the year it is deposited into the account.
- It encourages people to put at least $2,000 into their accounts so they can get the maximum benefit.
- It helps people think about their future in retirement and to plan for it.
- It may help people to want to reduce their overall debt to be able to make bigger contributions.
People Not Qualified for the Matching Contributions
Although the contributions will be given to people of low to middle income, there are some limitations. USCode.House.gov indicates that people who have not reached the age of 18 by the end of the year are not qualified, neither are dependents, students, or non-resident aliens.Individuals who only contribute enough to get a match of $0–100 will not get a contribution. Instead, they will receive a credit against their taxes.
Required Minimum Distributions Will Start Later
Another benefit the SECURE Act 2.0 provided is that it moves back to the age at which you must start getting required minimum distributions (RMDs). Although it is still a few years away, you can wait until you are 75. The NatLawReview says you can wait to start taking RMDS until you turn 74 after Dec. 31, 2032. The change enables your retirement account to continue to grow even longer.
If you turn 73 before Dec. 31, 2023, you must start taking RMDs by April 1, 2024. For any RMD less than the required amount, you will face a 25 percent penalty for the amount you did not take. The penalty amount gets reduced to 10 percent if you withdraw the correct amount within two years.
Even though the Saver’s Match retirement plan program does not start for a couple more years, you could get an early start by establishing the right retirement account to receive the match when it is finally offered. Talk to your employer or retirement planner to ensure you have it set up correctly to start receiving federal government contributions to your retirement plan.
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