When you file your taxes this year, your software of choice may prompt you to see if you’re eligible for the Saver’s Credit, which gives taxpayers under a certain income threshold a break for contributing to a retirement plan such as a 401(k) or individual retirement account.
Beginning in 2027, the credit will be replaced by the Saver’s Match, a federal program enacted as part of the 2022 Secure 2.0 Act, which, depending on a taxpayer’s retirement contributions and income, will deposit up to $1,000 per year directly into their account.
Some 21.9 million Americans could qualify to receive a contribution, according to the Employee Benefits Research Institute. And for those eligible for the match’s maximum benefit, the program has a chance to deliver powerful results. The Morningstar model of retirement outcomes projects eligible Americans to receive a boost of 12% to their wealth in retirement.
“It’s a great tool to help incentivize savings and build on the principles of behavioral finance,” says Spencer Look, associate director of retirement studies at Morningstar Retirement. “Even if people only qualify for a partial match, this is free money to get from the government for retirement.”
How the Saver’s Match works, and why it matters for you
One of the reasons Morningstar’s model is bullish on the Saver’s Match is that the current program it’s slated to replace hasn’t been a huge help to low-income retirement savers. That’s because the Saver’s Credit is non-refundable, meaning you can only claim it to the extent that it offsets money you owe in taxes.
Because many lower-income Americans get a tax refund rather than owing a bill, not many claim it. Only about 5.7% of taxpayers claimed the credit in 2021, according to the Internal Revenue Service.
The Saver’s Match will be available regardless of whether you owe tax. For single taxpayers with an adjusted gross income of $20,000 (or joint filers making up to $40,000), the government will match 50% of up to a $2,000 contribution to a qualified retirement account for a maximum match of $1,000 a year. Single filers with incomes between $20,000 and $35,000 qualify for reduced contributions.
If your income exceeds those thresholds, you won’t qualify for the match, but it’s still worth taking note of Morningstar’s results.
Even accounting for what the researchers call “leakage,” such as cashing out a 401(k) when you change jobs or withdrawing money early from retirement accounts — behaviors they say are more prevalent among low-income savers — the model shows that even modest contributions early on can make a huge impact on your long-term investing results.
Play around with CNBC Make It’s compound interest calculator and it’s easy to see why. A 22-year-old investor putting away $2,000 per year in a retirement account earning an annualized 8% return could expect to have about $835,000 by the time they retire at age 67. Bump the annual contribution to $3,000, and the total rises to $1.25 million.
“Seemingly small amounts of money may not feel like they’ll make a huge difference. But they do when they can compound and add up over time,” says Look. “That’s a great way to interpret the results.”
