The IRS is searching for comments on a brand new retirement savings option.
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The IRS is searching for comments on a brand new approach to save for retirement. The enhanced saver allowance builds on existing saver credits and has been described as an “important way to improve long-term financial security for millions of low- and moderate-income Americans.” Under the plan, eligible individuals who make annual contributions of as much as $2,000 to certain retirement plans starting in 2027 can receive as much as $1,000 every year in a saver allowance from the Treasury.
The Saver’s Match is made possible by the SECURE 2.0 Act of 2022.
background
SECURE 2.0 Act is a continuation of the SECURE Act of 2019, which focused heavily on pensions. President Biden signed the SECURE 2.0 Act on December 29, 2022, as a part of the Consolidated Appropriations Act of 2023. SECURE 2.0 Act made several changes to the prevailing law, including:
- Automatic registration. Beginning in 2025, employers that implement recent retirement plans after December 29, 2022, must routinely enroll eligible employees of their retirement plan—exceptions exist for small businesses with 10 or fewer employees, recent businesses, or church and government entities. However, employees are usually not required to participate and may opt out.
- Roth Account MatchesEmployers can modify their existing plans to permit employees to receive vested matching contributions to Roth accounts—a change from when matching was only done on a pretax basis.
- RMDSECURE 2.0 made several changes to RMDs (required minimum distributions). Some of the changes were confusing – and the IRS issued guidelines. Last yr Communication 2022-53 noted that the ultimate RMD regulations won’t apply until the 2023 distribution calendar yr on the earliest. Note 2023-54 added one other yr of relief by excusing missed RMDs for 2023 for ineligible named beneficiaries of IRA owners who died in 2020 or 2021 after the required start date. And, to not be outdone, Announcement 2024-35 added one other yr of relief (you’ll be able to read more about it here).
- Qualified charitable donations. Before the SECURE Act and SECURE 2.0, individuals age 70½ or older could contribute $100,000 annually from their IRA to qualified charities—the contribution could count toward the taxpayer’s required RMD. Starting in 2023, that quantity can be adjusted for inflation. In addition, taxpayers age 70½ or older can now make a one-time election and transfer as much as $50,000—indexed for inflation—from their IRA to a split-interest entity akin to a Charitable Remainder Unitrust.
- 529 plansStarting this yr (2024), you’ll be able to convert any unused 529 plan funds to a Roth IRA without penalty.
- Loans for college studentsAnd, importantly, Section 110 of the SECURE 2.0 Act allows employers to make matching contributions based on employees’ qualified student loan payments (QSLPs) under Section 401(k) plans, Section 403(b) plans, SIMPLE IRA plans, and state Section 457(b) plans.
Existing law
Under current law, the Savers’ Allowance is a nonrefundable tax credit price as much as $1,000 ($2,000 for married couples filing jointly) for middle- and low-income taxpayers who contribute to a retirement account.
Eligible taxpayers are people age 18 and older who are usually not full-time students and are usually not listed as a depending on another person’s tax return. Income limits apply – for 2024, your adjusted gross income (AGI) cannot exceed $38,250 ($76,550 for married taxpayers filing jointly and $57,375 for taxpayers filing as head of household).
New law
As a part of SECURE 2.0, the saver’s allowance can be replaced by the special saver’s contributions from December 31, 2026 (i.e. 2027). Eligibility stays income-dependent, and eligible taxpayers will proceed to be people aged 18 and over who are usually not full-time students and are usually not listed as dependents on one other person’s tax return.
Under Section 6433 of the Tax Code, eligible individuals can apply for a saver’s allowance of as much as $1,000 per individual (as much as $2,000 per married couple filing jointly). The allowance is calculated by multiplying retirement account contributions of as much as $2,000 by an income-related rate.
The Savers’ Allowance is subject to an income phase-out for single taxpayers with an adjusted annual income of $20,500 (full phase-out at $35,500) and an adjusted annual income of $41,000 for married taxpayers filing a joint return (full phase-out at $71,000). Phase-out amounts are adjusted for inflation.
Qualified retirement contributions include contributions to traditional and Roth retirement accounts and annuities (IRAs), voluntary deferrals and voluntary after-tax contributions to a piece 401(k), 403(b) or 457(b) plan, a SIMPLE IRA, a Simplified Employee Pension (SEP) plan, and contributions to a piece 501(c)(18) plan. The contribution generally doesn’t count toward retirement plan and IRA limitations.
The $2,000 contribution cap for the credit is adjusted for inflation. The copayment cap is a maximum of fifty% of contributions – or $1,000.
The grant amount have to be deposited directly into the taxpayer’s retirement account, which have to be a standard (non-Roth) IRA or the non-Roth portion of a piece 401(k), 403(b), or 457(b) plan for the good thing about an eligible individual, as required by section 6433(e)(2). If the grant amount is lower than $100, an eligible taxpayer may treat the quantity as a refundable income tax credit quite than a contribution to the retirement account.
Request for comment
As you’ll be able to imagine, this recent rule raises many questions. The IRS is searching for comments on a lot of topics, including:
- What practical considerations should the IRS bear in mind when providing guidance regarding eligibility?
- What considerations should the IRS make regarding the tactic by which an eligible individual must apply for the Savers’ Grant Contributions?
- Do eligible individuals must file Form 1040 to assert a Savers Grant or should a standalone form be used?
- What default election ought to be made if an eligible individual claims a Savers Grant of lower than $100 but doesn’t elect an applicable retirement savings vehicle to receive the Savers Grant?
- How should eligible individuals designate a pension plan as an applicable retirement savings vehicle to receive the applicable saver contributions?
- What steps might be taken to be sure that a saver’s relevant contribution is appropriately transferred to the relevant retirement savings vehicle of an eligible person?
- What considerations should the IRS make regarding the treatment of erroneous saver contributions?
- What information have to be available to assist eligible individuals resolve whether a specific IRA or retirement plan will accept savers’ contributions, and where must that information be found?
All questions and further background information might be present in Notice 2024-65.
The IRS wants to listen to from you. Comments are solicited from all stakeholders, including low- to moderate-income taxpayers, volunteer and for-profit tax preparers, organizations that serve and advise low- to moderate-income taxpayers, IRA administrators and trustees, retirement plan administrators, archivists, and plan sponsors.
Written comments could also be submitted no later than 4 November 2024, either to www.regulations.gov or by mailing comments to Internal Revenue Service, CC:PA:01:PR (Notice 2024-65), Room 5203, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
