Last week, the IRS “reminded low- and moderate-income taxpayers that they can save for retirement now and possibly earn a tax credit in 2025…” (IR 2024-298, 11/25/24)
Which is true. But it’s not news and it’s not exciting. And if the goal is to increase the amount that middle-class Americans save for retirement, it’s also bad policy.
Why bad policy?
1. Families who earn less than the credit’s income limits probably can’t afford to save for retirement
A married couple whose AGI is greater than $76,500 is NOT eligible for the credit because they make too much money. “$76.5k is too much, sorry folks,” says the IRS. So households earning less than $76.5k are eligible for the credit, but can they afford to save for retirement? Not likely. They’re probably more focused on paying for housing and childcare.
2. The credit decreases as income approaches $76,500
The credit amount is 50%, 20%, or 10% of the amount saved for retirement, decreasing as the household’s AGI increases.
For a married couple, the credit drops from 50% to 20% once AGI hits $46,001. If you’re single, you hit that threshold at $23,001.
Y’all, I’m not making this up. No wonder we have a retirement savings crisis.
So, our married couple who earns just little enough ($76,500) to qualify for the credit and saves $2,400 for retirement over the course of a year can claim a credit of $240, or 10% of the total saved.
Not terrible – I’d take it. But doubtful that it moves the needle on this family’s overall well-being and readiness for retirement.
3. The credit is non-refundable, so the lowest income taxpayers may not receive the entire credit
The credit is limited to the household’s total income tax and cannot be applied against self-employment tax. So taxpayers who pay little or no tax after the standard or itemized deductions are applied could end up claiming less than the full credit amount, effectively punishing families who are least able to save for retirement.
Potential solutions
I don’t love being Debbie Downer, so if you’re reading this and happen to hold a seat in Congress, here’s how we can make this tax credit a key part of the country’s strategy to help the middle class be prepared for retirement:
- Increase the income limit to $200,000 – this is where middle class families are in the 2020s. Meet them where they are.
- Reduce the credit’s phaseout – A family who earns $100k should be able to claim a credit for 50% of what they save for retirement.
- Make the credit refundable – This guarantees that all eligible taxpayers receive the full benefit of the credit and doesn’t discriminate against lower income savers.
Changes like these would go a long way to encourage families to save for retirement and chip away at the savings crisis.