The Retired Investor: IRS Incentive Boosts for Savers Not Nearly Enough

Saving for retirement will get a little more attractive next year. Given the dire state of savings in this country, anything that convinces workers they need to save more will be beneficial.

 

The Secure Act 2.0, enacted in 2022, ushered in several additional improvements in retirement savings, including even higher 401(k) plan catch-up contributions. The object was to make it easier for older American workers facing a retirement savings shortfall to set aside more money quickly. 

 

The facts are that there is a widespread retirement savings shortfall in the U.S. that spans generations. Sixty-five percent of Baby Boomers (age 55-64) have less than $25,000 to $100,000 saved toward retirement. If we use $500,000 as a marker, less than 7 percent of boomers saved that much and only 5 percent of the GenX generation (45-54).

 

Younger generations like older millennials (35-43) are not much better off and 10 percent lack a 401(k) entirely. However, 65 percent of Gen Z and younger millennials (21-34) do have $25,000 to $100,000 saved but doubt whether they will ever reach $1 million by retirement. Overall, if one believes the benchmark total of $1 million is needed to retire, only 2 percent of 401(k) holders have achieved that. And over one-third of Americans today believe they will never reach that benchmark.

 

In 2025, the government will provide a few more incentives to bolster savings. Contributions for 401(k), 403(b), governmental 457 plans, and the federal government's Thrift Plan will inch higher. The new limit for all the above plans will increase by $500 to $23,500.That is not much, but every little bit helps. For older workers, aged 50 and up, additional savings are allowed under a catch-up plan. 

 

While the catch-up contribution limit for those 50 or older remains the same, bringing their total contribution to $31,000, those workers between 60 and 63 years old can save even more in the coming year. The catch-up limit for those in their early sixties increases by $11,250 annually. That is substantially higher than the $7,500 allowable now.

 

The contribution limits for Individual Retirement Accounts (IRAs) will remain $7,000. The catch-up limit for individuals over 50 stays the same as well at $1,000.

 

For those who favor contributing to Roth IRAs, there is some good news. The income limit range for workers will increase to between $150,000 to $161,000. If you are married and file jointly, the range increases to between $236,000 and $246,000, which is up from $230,000 to $240,000. 

 

There are some additional incentives to at least jump-start savings for the 32 percent of working-age Americans (about 58 million people) without a retirement savings plan. The income limit for the Retirement Savings Contributions Credit, also known as the Saver's Credit, was increased. The Saver's Credit, available since 2001, is a tax credit worth up to $1,000 ($2,000 if married and filing jointly) for mid- and low-income taxpayers who contribute to a retirement account.

 

To qualify, you need to be over 18, not a full-time student, or a dependent on someone's tax return. Your adjusted gross income in 2025 needs to be below $79,000 for married couples and $59,250 if you head a household. If you are single or married but filing separately your income cannot exceed $39,500.

 

It baffles me why Americans aren't saving more in retirement accounts. Many say they just can't afford to max out their savings plans even when their companies offer to match some portion of their contributions. That may be true in many cases. Thus far, there is no other way to force Americans to save for retirement other than through the Social Security tax on income.

 

Given the worries over the deficit, funding, and continuing threats by some to cut Social Security benefits, why hasn't it happened already? The simple answer is if you cut Social Security, millions of people with no savings will end up destitute and on government life support in retirement. That would be an even more expensive proposition than the Social Security system.

 

Yet changes to the Social Security program seem inevitable at some point. If so, why not require the government to match retirement plan contributions while reducing Social Security benefits simultaneously for those under retirement age?

 

In the short term, it might be moving the chips from one side of the table to the other, but it need not be forever. The trick would be to incentivize workers to establish a savings habit. That wouldn't take too long. Once accomplished, especially with savings withdrawn from paychecks automatically (just like Social Security taxes), the match could be raised or lowered depending on circumstances.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.