Notwithstanding the enormous subsidies under the Internal Revenue Code for qualified retirement plans, the bottom two quartiles of workers are not broadly participating. In a recently released study from the Joint Committee, the “take-up rate” is only 76% of workers with access to a qualified retirement plan actually participate.1 In other words, 24% of workers with access to a qualified retirement plan chose not to participate. At the bottom quartile, only 5% report any pension income while only 21% in the next quartile reported pension income.2
Section 25B of the Internal Revenue Code permits eligible lower-income individuals to claim a credit (“saver’s credit,” claimed on Form 8880) against income tax and alternative minimum tax for elective contributions to 401(k) plans, 403(b) annuities, Sec. 457 plans, SIMPLE or simplified employee pension (SEP) plans, traditional or Roth IRAs, voluntary after-tax employee contributions to a qualified retirement plan or a 403(b) annuity and contributions to an ABLE account for the contributor’s benefit.
An individual must be 18 or older, not a full-time student and not claimable as an exemption.
The credit rate (50%, 20%, or 10%) depends on the taxpayer’s filing status and modified adjusted gross income (AGI), with the AGI limits indexed for inflation. Eligible contributions are limited to $2,000 per individual. For example, in 2021, the maximum credit rate of 50% is available for a couple filing jointly on income up to $39,500. A couple making more than $66,000 is ineligible for any credit. The maximum credit of $2,000 (50% of $2,000) is nonrefundable.
A new direction
Sen. Ron Wyden of Oregon, the chair of the Senate Finance Committee, recently introduced the Encouraging Americans to Save Act (EASA).3 EASA reforms the saver’s tax credit into a federal matching contribution for those middle- and low-income working Americans contributing to either an employer-sponsored plan or through their own IRA. Specifically, the legislation would offer matching contributions for the first time to millions of individuals not covered by an employer-sponsored retirement plan. That would benefit those saving through a state or local government-sponsored IRA, such as OregonSaves. Such workers would be automatically enrolled if they lacked access to an employer-sponsored plan.
If enacted, the proposal represents a substantial improvement over the current saver’s credit. Those taxpayers presently owing no federal income taxes could benefit. The government match encourages saving by middle- and low-income earners by providing an immediate and verifiable return on their personal contributions. Because the match would be deposited directly into the taxpayers’ account instead of being sent to the individual as a tax refund, the money would be saved rather than spent.
The Encouraging Americans to Save Act would replace the current saver’s credit with a simple, 50% government match on contributions of up to $1000 per year made to 401(k)-type plans and IRAs by individuals with income up to $32,500 and couples with income up to $65,000. Both the income caps and contribution limits would be indexed for inflation. The match is phased out over increments of $10,000 for individuals and $20,000 for couples. EASA also reestablished the Obama administration’s MyRA program.
Claiming the match requires filing either the 1040 or 1040 EZ income tax form. The match is then deposited directly into a worker’s IRA, 401(k), or similar account using the account number provided by the worker. If the individual provides an erroneous account number or none at all, the match would be deposited into a MyRA account or a Roth IRA maintained by the U.S. Treasury. Amounts saved in MyRA accounts will be invested in Treasury bonds.
The Treasury will need to coordinate the establishment of MyRA accounts with state and local government laws that enroll workers in retirement savings accounts. The bill requires the Secretary of Education to embark on an education program stressing the benefits of a refundable matching contribution as part of a revived MyRA program.
Longer term implications for charities
While the primary goal of the legislation is increasing the likelihood of improved retirement income, charity might be an unintended beneficiary. Those enjoying a secure retirement would be more comfortable giving, especially if in coordination with a qualified charitable distribution (QCDs). Those still working might also be more receptive to giving appeals if confident about their ability to meet retirement goals.
In my next blog post I will review the movement to create automatic IRA-type savings plans at the state level in California, Illinois and Oregon.
By Prof. Christopher P. Woehrle, JD, LLM
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