The Establishing Every Community for Retirement Enhancement Act of 2019, better known as the SECURE Act, which was originally passed by the House in July 2019, has been approved by the Senate on December 19, 2019, as part of a year-end budget law and accompanying fiscal measure, and signed into law on December 20, 2019 by former President Donald Trump. The far-reaching bill includes important provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
Key points to remember
- The SECURE Act came into effect on December 20, 2019 and makes it easier for small business owners to set up “secure”, less expensive and easier to administer pension plans.
- Many part-time workers are eligible to participate in an employer pension plan.
- The SECURE Act pushed back the age at which retirement plan participants must receive required minimum distributions (RMDs), from 70½ to 72, and allows traditional IRA owners to continue making contributions indefinitely.
- The SECURE Act requires most non-spouses inheriting IRAs to take distributions that eventually empty the account within 10 years.
- The SECURE Act allows 401(k) plans to offer annuities.
A troubled pension system
That there are problems brewing in the US retirement system, which forces most workers to complete Social Security with personal savings, has been widely recognized.
According to data from the United States Bureau of Labor Statistics released in 2020, only 55% of the civilian adult population participates in a workplace pension plan. And even those who do are often terribly late when it comes to investing part of their salary.
Wealth management giant Vanguard, for example, revealed in early 2019 that the median 401(k) the balance for those aged 65 and over is only $58,035. The SECURE Act aims to encourage employers who had previously turned away from these plans, which can be expensive and difficult to administer, to start offering them.
417 to 3
The margin by which the SECURE Act passed the US House of Representatives in May 2019.
“With [the] passage of this bill, the House has made significant progress in solving our country’s retirement crisis and helping workers of all ages save for their future,” said Rep. Richard E. Neal (D- Massachusetts) in a statement after the bill passed through the House. in May 2019.
Tangled in the Senate
Despite overwhelming support for the SECURE Act in the House, it did not pass the Senate until it was attached to the appropriations and tax prorogation bills that passed the following day. impeachment of President Trump in the House of Representatives.
Early July 2019, Planadviser reported that two Republican senators — including Ted Cruz (R-Texas) — were holding him back. According to a Washington insider, Cruz was trying to change the section on 529 accounts so parents could also use them for homeschooling expenses.
In October 2019, plan sponsor quoted Chris Spence, senior director of government relations for the TIAA, as saying the bill remained “in something like legislative limbo.” With Cruz, two other senators, Mike Lee and Pat Toomey, expressed reservations on certain technical points. Spence was optimistic and correctly predicted that the path to passage could be to be attached to a larger bill that was due to pass by the end of 2020.
Main provisions of the SECURE law
The SECURE law modified a certain number of rules relating to tax-efficient retirement accounts. Here is what it does:
- Makes it easier to set up 401(k) plans for small businesses by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans from 10% of wages to 15%.
- Provides a maximum tax credit of $500 per year to employers who create a 401(k) plan or SIMPLE IRA with automatic enrollment.
- Allows companies to hire part-time employees who work either 1,000 hours in the year or three consecutive years with 500 hours of service.
- Encourages plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
- Raises the age at which pension plan members must take minimum required distributions (RMD) from 70½ to 72.
- Allows the use of tax benefits 529 accounts for qualified student loan repayments (up to $10,000 per year).
- Allows penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.
- Encourages employers to include more annuities in 401(k) plans by removing their fear of legal liability if the annuity provider does not provide, and also by not forcing them to choose the cheapest plan. (It could be something a double-edged sword. Employees should carefully consider these options.)
Another key change in the bill paid for all of this: the removal of a provision known as stretch ira, which allowed non-spouses inheriting retirement accounts to spread the disbursements over their lifetime. The new rule requires full payment of the inherited IRA within 10 years of the death of the original account holder, generating approximately $15.7 billion in additional tax revenue.
Planners assess these changes
While retirement planner Margherita ChengCEO of Blue Ocean Global Wealth in Gaithersburg, MD, warns the bill is far from a panacea for the nation’s retirement challenges, she says several of the provisions represent a step in the right direction.
In particular, she notes that reducing the number of hours employees must work to enroll in 401(k)s can help broaden participation. “It’s useful for part-timers, whether they’re just entering the workforce or about to leave,” Cheng says.
And she is in favor of adding flexibility to 529 accounts, which could be used to pay off some student loans under the bill. It’s a good option, she says, for parents who may have leftover funds in a college savings account and want to help a child who has already graduated. “The SECURE law provides more flexibility,” Cheng says.
For David Rae, a Los Angeles-based financial planner, moving the starting age for required minimum distributions to 72 also makes sense, given that people are living longer than they were a generation ago. “Pulling back RMDs will help people make their money last a little longer, especially as more of them work later,” says Rae.
Impact on IRAs
The impact of the SECURE Act on retirement accounts like IRAs and 401(k)s will be significant. Eric BronnenkantCPA, CFP®, Head of Tax at Betterment, outlines what will change and how it will impact savers.
Legacy IRAs: The parts of the SECURE Act that will have the most immediate impact on average Americans are its new guidelines regarding inherited IRAs. So suppose you inherited a retirement plan like an IRA or a 401(k) as a non-spouse beneficiary. Under the old rules, you could withdraw from that retirement account for the rest of your life, but under the SECURE law, you’ll have to withdraw that money within 10 years. Basically, thanks to the SECURE law, you are obliged to pay your taxes sooner. Those who have saved a lot of money in their 401(k) or IRA, and hope to leave that money to a non-spouse beneficiary, may want to rethink their strategy on who they choose as beneficiary, recognizing this new, shorter time frame.
IRA contributions: The SECURE Act will also impact traditional IRA contributions. Under the old rules, you had to be under 70.5 to contribute to a traditional IRA, but under the SECURE law, anyone of any age can make a traditional IRA contribution. Of course, you still need to be able to show earned income (like employment or self-employment), but before the SECURE Act, if you were 85 and still working, you wouldn’t have been able to contribute to a Traditional IRA. Now you’ll still be able to contribute, regardless of your age: workers over 70.5 can now make traditional IRA contributions, potentially allowing them to make disguised Roth IRA contributions as well.
Impact on student debt
The SECURE Act also allows people to withdraw up to $10,000 during their lifetime from their 529 plans, tax-free, to pay off student loan debt. Originally, 529 plans were strictly for post-secondary expenses, but this has been expanded to include K-12 expenses.
Under the SECURE Act, 529 funds can be used to pay off college debt. That said, not all states can allow the student loan benefit to exit tax-free at the state level.
May the SECURE law end up being a retirement is a game changer or not remains to be seen. But one thing is abundantly clear: the previous rules did not allow enough Americans to set aside the nest egg they will eventually need for a secure retirement.