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Budget Header 2011

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Expand saver's credit and require automatic enrollment in IRAs

Under current law, low- and middle-income taxpayers may claim a saver’s credit of up to $1,000 ($2,000 for couples) if they contribute to retirement savings plans. The credit equals the credit rate times up to $2,000 of contributions to IRAs, 401(k)s, or certain other retirement accounts by each taxpayer and spouse. The credit rate for 2010 depends on income and tax filing status as shown in the following table. (For 2010, couples filing jointly must have income below $55,500, heads of household income below $41,625, and other tax filers income below $27,750 to claim any credit.) The credit is not refundable and therefore has limited value for people with little or no income tax liability.

Saver’s Credit Rates by Tax Filing Status and Adjusted Gross Income


Credit Rate (percent)

Income Tax Filing Status


Married filing jointly


Head of household

Single, Married filing separately, or
Qualifying widow(er)


Up to $33,500

Up to $25,125

Up to $16,750


$33,500 - $36,000

$25,125 - $27,000

$16,750 - $18,000


$36,000 - $55,500

$27,000 - $41,625

$18,000 - $27,750

No credit

Over $55,500

Over $41,625

Over $27,750

Source: IRS Announces Pension Plan Limitations for 2010, IR-2009-094, October 15, 2009

The president proposes to make the saver’s credit refundable as a 50-percent credit up to $500 in contributions per individual (indexed for inflation), making the maximum credit $250 per individual.  The full credit would go to families with income below $65,000 ($48,750 for heads of household and $32,500 for singles and married couples filing separately).  The credit would phase out when income exceeds those limits: the maximum credit would be reduced by 5 percent of income over the relevant limit. In addition, the president proposes to make the credit more like a matching contribution on a 401(k) by allowing it to be automatically deposited into the saver’s retirement account.

The government would effectively pay half the cost of up to $1,000 deposited to a retirement account each year for all eligible households. For example, a family that puts $800 aside in a retirement account would receive a $400 tax credit, lowering the net cost of the contribution to $400. Turning the currently nonrefundable saver’s credit into a refundable credit would encourage low-income households to save more by boosting their effective return to saving. The phaseout of the credit would, however, modestly raise effective marginal tax rates for some middle-income taxpayers with potentially adverse behavioral effects on work effort and saving. In addition, while the president’s proposal expands the number of Americans eligible for the credit, it also reduces the maximum benefit of the credit for some households.

The president also proposes to establish automatic enrollment in IRAs for employees without access to an employer-sponsored saving plan. Currently, workers who wish to contribute to an IRA must first establish the account, actively make a decision to contribute each year, transfer funds into the IRA, and decide how to invest their contributions. The president proposes to make this process automatic. Under the president’s proposal, most employers who do not currently offer retirement plans—except those with less than 10 employees or firms in business less than two years—would be required to enroll employees in a direct-deposit IRA account unless the worker opts out. The default contribution rate would be set at 3 percent of compensation, and contributions would automatically be invested in standard, low-cost investments. Furthermore, the default option would be a Roth IRA, funds for which come from after-tax income, as opposed to a deductible IRA, which is funded from pretax income.

Research has shown that changing the default from an opt-in provision to an opt-out provision markedly increases worker participation in 401(k)–type plans, especially for demographic groups with traditionally low saving rates. The administration suggests that this trend will hold for automatic enrollment in IRAs, increasing saving rates for workers without workplace retirement plans and helping to reverse the nation’s prolonged trend of low saving rates.

In conjunction with automatic enrollment, the administration proposes a modest credit of up to $250 per year, for not more than two years, to help small businesses cover the costs of automatic enrollment. In addition, the proposal would double the tax credit for small businesses starting new employee retirement plans from $500 to $1,000, available for a maximum of three years.

Expanding the saver’s credit would reduce revenues by $29.8 billion over 11 years, while requiring automatic enrollment in IRAs and doubling the retirement plan startup credit for small businesses would cost $10.4 billion. However, making Roth IRAs the default option reduces the short-term cost of automatic enrollment since the tax benefit of Roth IRAs—and the consequent revenue loss—does not come until workers withdraw funds in retirement. That outcome shifts much of the cost of this proposal beyond the 2011-2020 budget window, causing the 10-year revenue loss to substantially understate the provision’s lifetime cost.

Additional Resources
Tax Policy Briefing Book: Savings and Retirement: How might saving be encouraged for low- and middle-income households?
Tax Topics: Pensions and Retirement Savings
Automatic Enrollment in IRAs: Costs and Benefits, Benjamin H. Harris and Rachel M. Johnson, Tax Notes, August 31, 2009, pp. 903-914