Signed into law by President Trump on December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, is intended to increase access to
tax-advantaged retirement accounts, helping older Americans in retirement and encouraging
employers to offer 401(k) plans.
The new act, which went into effect on January 1, 2020, will affect IRAs, 401(k) plans, and other
retirement accounts.
What Has Changed
The SECURE Act has made several changes related to tax-advantaged accounts:
Increasing the cap for small
businesses to automatically
enroll workers in safe harbor
retirement plans from 10% of wages to 15%.
Providing a $500 tax credit per
year to employers who create
a 401(k) or SIMPLE IRA plan with
automatic enrollment.
Allowing businesses to enroll
part-time employees who have
worked 1,000 hours throughout the
year or 500 hours for three
consecutive years.
Encouraging plan sponsors to
offer annuities in their 401(k)
plans by reducing their liability if the insurer can’t meet its financial obligations, and also not requiring them to choose the lowest-cost plan.
Removing the “one bad apple rule” for multiple employer
retirement plans, which required that all of the participating small businesses meet the plan requirements or it failed for all of them. Now multiple employer plans will enjoy the economy of scale and be able to provide more plan features.
Eliminating the maximum age
for traditional IRA contributions,
which was previously capped at 70½ years old.
Allowing a penalty-free withdrawal of $5,000 from 401(k) plans to help with the costs of having or adopting a child.
Allowing the use of $10,000 annually from 529 plans to
repay student loans.
Changing the age of required minimum distributions (RMDs) on retirement accounts from 70½ to 72.
Another change is the removal of the stretch IRA, which is estimated to raise $15.7 billion in tax
revenue. This rule allowed non-spouses who inherited an IRA to stretch the disbursements over
their lifetime. With the new rule, non-spouses who inherit an IRA will be required to take a full payout
from the account within 10 years of the original account owner’s death, beginning with account holders who die in 2020. With the changes to inherited IRAs, it will be important for account owners to review their estate plans and the potential tax consequences.
The Jury Is Out
While it will take time for the jury to come in on whether the SECURE Act will make positive
changes in helping Americans save for retirement, many financial experts appear to be optimistic and believe it is a step in the right direction. As expected, other experts feel it will have a limited
impact on saving.
One thing experts can agree on is that Americans are currently not financially prepared for retirement, and changes are needed to put
people on the path toward financial security. Hopefully, the SECURE Act is the impetus for that change.
