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What is the SECURE Act? What You Should Know

Jul 13, 2021 4 min read Ben Gran

Key takeaways

  • The SECURE Act makes it easier for some workers to save for the future, but for many who have already accumulated 401(k) and IRA wealth, planning has become much more complicated.
  • Congress wants those who have 401(k) plans to focus on retirement income, including guaranteed lifetime income.
  • The act’s broad impact will have implications for both retirement and estate planning.

 

 

What is the SECURE Act and why was it created?

Many American workers aren’t saving enough for retirement. For working Americans between the ages of 55 and 64, the median retirement account balance is only $15,000,1 and 66% of working millennials ages 21 to 32 Opens in new window have nothing saved for retirement.

Passed in 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act addresses this problem by bringing significant changes to America’s retirement planning system, aiming to improve the retirement readiness of millions of Americans. It accomplishes this by increasing access to workplace plans, improving retirement savings potential and making it easier for workers to convert savings to guaranteed retirement income.

 

How has the SECURE Act impacted 401(k)s and IRAs?

There are several ways that the SECURE Act could affect your strategies for retirement savings, including those with 401(k)s and IRAs. Key provisions of the act that is currently in effect include:3

  • Incentives for small businesses to offer retirement plans: Under the SECURE Act, small businesses receive the following:
    • A tax credit of up to $5,000 to help cover the costs of starting a retirement plan.
    • An additional tax credit of $500 a year for three years if their plan offers automatic enrollment, meaning employees are automatically signed up for the company's retirement plan unless they opt out. Automatic enrollment has been proven to increase employees’ retirement plan participation and retirement savings rates.
  • Multiple-employer plans: The act permits unrelated small businesses to join forces and share the costs and administrative work of managing a retirement plan—even if they're not in the same industry.
  • The ability for long-term, part-time employees to participate in a retirement plan: Pre SECURE, most part-time employees were not eligible to participate in tax-advantaged, employer-sponsored retirement plans. The act allows part-time employees to participate in these plans, as long as they’ve worked at least 500 hours per year for three consecutive years.
  • Annuities and lifetime income options:
    • Several provisions in the act encourage employers to offer guaranteed lifetime income options in their retirement plans by simplifying some of the compliance and fiduciary rules and offering a safe harbor provision for annuities.
    • Plan sponsors are required to provide participants with an annual disclosure that estimates the monthly payment they will receive at retirement, and employees will be permitted to roll the annuity from their plan to an IRA when they retire.
  • A delay in required minimum distributions (RMDs) to age 72: Pre SECURE, employees who participate in an employer-sponsored retirement plan and/or individual retirement account (IRA) owners are required to begin taking RMDs from their retirement accounts at age 70 1/2. The SECURE Act delayed RMDs until age 72 (if you were born after July 1, 1949). This provision could help retirees’ money last longer, which is especially important as people are living and working longer than previous generations.
  • The repeal of age limits for IRA contributions: The SECURE Act also permits people over age 70 1/2 to contribute to a traditional IRA.
  • The elimination of stretch IRAs: Pre SECURE rules allowed non-spouse beneficiaries of IRAs and defined contribution accounts to take distributions across their life expectancies, thereby extending the opportunity to defer taxes—this is referred to as stretching the account. With some limited exceptions, the SECURE Act requires non-spousal beneficiaries of IRAs and defined contribution plans to completely withdraw their inherited accounts within 10 years. Since many of those inheriting IRA accounts will be of working age, these withdrawals will be taxed above and beyond wages, often at high marginal rates. IRA owners can still pass these assets to a spouse without facing this tax, but the tax will be due within ten years of a spouse’s death. This would likely affect estate planning strategies when using IRAs and defined contribution plans to transfer wealth or leave an inheritance as tax minimization strategies will be available.

The above is just a summary how the SECURE Act impacts both retirement and estate planning. While expanding 401(k) savings opportunities is a big win for Americans, planning for the future is now much more complicated. Make sure you have a strategy in place to maximize the benefits of the act and your retirement savings potential.

As of this writing, a revised version of the act called SECURE Act 2.0 had passed the House Ways and Means Committee and was headed to full House. Amongst other changes, the newer version would require employer retirement plans to automatically enroll employees once they are eligible. The act could still change further before going to the House, and experts say it is likely to pass.2 If passed, the SECURE Act 2.0 could further complicate things.

 

What you can do next

Talk to your financial professional, tax advisor or estate planning professional to manage the changes and opportunities of the SECURE Act.

Footnotes

Sources:

  1. 1. Schwartz Center for Economic Policy Analysis, “Inadequate Retirement Savings for Workers Nearing Retirement,” http://www.economicpolicyresearch.org/resource-library/research/inadequate-retirement-savings-for-workers-nearing-retirement

  2. 2. Plan Advisor, “‘Secure Act 2.0’ Likely to Become a Reality,” https://www.planadviser.com/secure-act-2-0-likely-become-reality/

  3. 3. Financial Advisor, “Sponsor Insights: What Every Financial Advisor Needs to Know About the SECURE Act of 2019,” https://www.fa-mag.com/news/what-every-financial-advisor-needs-to-know-about-the-secure-act-of-2019-45618.html?section=40

 

Ben Gran is a freelance writer based in Des Moines, Iowa. He writes about personal finance, public policy, financial services, technology, and business.

 

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