Picture this: you’ve worked hard all your life, saved a tidy nest egg, and now you’re finally ready to retire and live out your golden years in peace.
But then, just as you’re about to kick back and relax, a new law comes along and shakes things up. This law called the Secure Act, is designed to help Americans save more for retirement. But what exactly is the Secure Act, and how will it impact your retirement plans?
Get ready to learn about one of the most significant changes to retirement savings in recent history.
Introducing the Secure Act
The Secure Act is a piece of legislation that Congress passed in December 2019, and it’s causing quite a stir in the world of retirement planning.
At its core, the Secure Act is about encouraging Americans to save more for retirement, but how it does this is both innovative and controversial.
The proposed legislation includes several key provisions to encourage Americans to save more for retirement and make it easier for employers to offer retirement plans to their employees. Here are some of the most significant provisions:
Under this provision, employers would be required to automatically enroll their employees in retirement plans, such as 401(k) plans, unless the employee opts out. This would make it easier for workers to start saving for retirement without having to take any action, and it would also ensure that employer-sponsored retirement plans cover more workers.
This provision has been shown to be highly effective at increasing retirement savings rates. Studies have found that workers are much more likely to participate in retirement plans when automatically enrolled than when they have to take action to enroll themselves. This is because many workers never get around to enrolling in their employer’s retirement plan, even if they intend to do so.
One potential concern with automatic enrollment is that some workers may not be able to afford the contributions, especially if they are automatically enrolled at a high contribution rate. To address this concern, the SECURE 2.0 Act includes provisions to allow workers to opt out of automatic enrollment or adjust their contribution rates.
Increase in catch-up contributions
The SECURE 2.0 Act includes a provision to increase catch-up contributions for workers over the age of 50. This may not sound exciting, but it’s a big deal for anyone behind on their retirement savings.
The current catch-up contribution limit is $6,500, which means that workers over the age of 50 can contribute an additional $6,500 to their retirement accounts on top of the regular contribution limit. The SECURE 2.0 Act would increase this limit to $10,000, giving older workers an even greater opportunity to save for retirement.
Why is this important? Well, many workers are not saving enough for retirement. According to a recent survey, the median retirement savings for Americans between the ages of 55 and 64 is just $120,000 – far less than most financial experts recommend. Increasing the catch-up contribution limit allows older workers to make up for lost time and get on track for a more secure retirement.
But the increase in catch-up contributions is also significant for another reason: it recognizes the changing nature of work in America. With more and more workers staying in the workforce well into their 60s and even 70s, it’s important to ensure that older workers have the tools they need to save for retirement.
The increase in catch-up contributions is one way to do that, and it sends a message that older workers are valued and important contributors to the economy.
Expansion of eligibility for part-time workers
The Secure Act also includes a provision that expands eligibility for part-time workers to participate in employer-sponsored retirement plans.
Previously, many employers required employees to work at least 1,000 hours per year to be eligible to participate in their retirement plans. This requirement often excluded part-time workers who did not meet the threshold.
The Secure Act changes this requirement so that long-term part-time employees who work at least 500 hours per year for three consecutive years are eligible to participate in their employer’s 401(k) plan. This means that more part-time workers can access retirement savings options and take advantage of employer-matching contributions and other retirement benefits.
This provision is especially important for women and other individuals who may work part-time due to caregiving responsibilities or other factors. By allowing more part-time workers to participate in employer-sponsored retirement plans, the Secure Act helps to address the retirement savings gap and improve financial security for these individuals.
New tax credit for small businesses
The Secure Act introduces several new tax credits for small businesses that start or maintain a retirement plan for their employees.
One of the tax credits is the “Small Employer Pension Plan Start-Up Credit,” which provides eligible small employers with a tax credit of up to $5,000 for the first three years of starting a new retirement plan. This credit is available to employers with no more than 100 employees who have received at least $5,000 in compensation in the preceding year.
Another tax credit is the “Automatic Enrollment Credit,” which provides eligible small employers a tax credit of up to $500 per year for three years for implementing an automatic enrollment feature in their retirement plan. This credit is available to employers with no more than 100 employees who automatically enroll employees in their retirement plan at a rate of at least 3% of compensation.
In addition, the Secure Act also creates the “Small Employer Plan Maintenance Credit,” which provides eligible small employers with a tax credit of up to $500 per year for three years for the costs associated with maintaining their retirement plan. This credit is available to employers with no more than 100 employees who have received at least $5,000 in compensation in the preceding year and who have implemented an eligible retirement plan.
These tax credits are designed to encourage small businesses to offer retirement plans to their employees, which can help improve employee retention, attract new talent, and provide financial security for workers in their retirement years.
Simplification of 401(k) safe harbor rules
The Secure Act includes provisions that simplify the rules for 401(k) safe harbor plans, which are retirement plans designed to pass certain nondiscrimination tests automatically and exempt from certain requirements.
Under the previous rules, employers had to provide notice to employees about the safe harbor plan before the beginning of each plan year. If they wanted to change or suspend the plan mid-year, they had to provide a supplemental notice to employees within a specified timeframe. Failure to meet these requirements could result in a costly penalty.
The Secure Act simplifies these rules by allowing employers to amend their safe harbor plans any time before the plan year’s end, as long as they make a non-elective contribution of at least 4% of compensation for eligible employees (or a matching contribution that meets certain requirements). This means employers have greater flexibility in making changes to their safe harbor plans without worrying about complex compliance requirements.
In addition, the Secure Act eliminates the annual safe harbor notice requirement for plans that use the non-elective contribution option and provides a new opportunity for plans to become safe harbor plans mid-year by making a non-elective contribution of at least 4% of compensation for all eligible employees.
These changes make it easier for employers to establish and maintain safe harbor plans, which can help increase participation in retirement plans and improve financial security for employees.
Incentives for annuities
The Secure Act includes provisions that provide incentives for employers to offer annuities as a retirement savings option for their employees.
An annuity is a financial product that provides regular payments to an individual over a specific time period, typically for the rest of their life. Annuities are designed to protect individuals from outliving their savings and can provide a stable source of income in retirement.
Under the Secure Act, employers who offer annuities in their retirement plans are provided with certain protections from liability as long as they meet certain requirements. This means that employers who offer annuities are not held liable if the insurance company providing the annuity is unable to meet its financial obligations under the contract.
In addition, the Secure Act requires employers to provide better disclosures about annuity options in their retirement plans, including information about fees, expenses, and the lifetime income stream that annuities can provide.
These provisions are intended to encourage more employers to offer annuities in their retirement plans, which can help provide more retirement income security for employees. By offering annuities, employees can have a guaranteed source of income in retirement, regardless of how long they live or how the market performs.
The Benefits of the Secure Act
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was designed to make it easier for Americans to save for retirement and address some of the shortcomings in the U.S. retirement system. Here are some benefits of the SECURE Act:
Increased Access to Retirement Savings: The SECURE Act makes it easier for small businesses to offer retirement plans to their employees by allowing them to join multiple employer plans (MEPs) and receive tax credits for starting a new plan.
Later Required Minimum Distributions (RMDs): The SECURE Act increased the age for required minimum distributions (RMDs) from 70.5 to 72, giving retirees more time to grow their retirement savings before being forced to take withdrawals.
Elimination of Maximum Age for Traditional IRA Contributions: The SECURE Act eliminates the maximum age limit of 70.5 for contributions to traditional IRAs, allowing older workers to continue to save for retirement.
Increased Contribution Limits: The SECURE Act increased the maximum contribution limit for automatic enrollment in 401(k) plans from 10% to 15% and also allows long-term, part-time employees to participate in 401(k) plans.
Changes to Inherited IRA Rules: The SECURE Act changed the rules for inherited IRAs, requiring most non-spouse beneficiaries to withdraw the entire balance within 10 years of the account owner’s death. This change accelerates the payment of taxes on inherited accounts and could result in more revenue for the government.
What's the Impact of the SECURE Act on IRAs?
The SECURE Act has several impacts on individual retirement accounts (IRAs). Here are some of the key changes:
Increased age limit for traditional IRA contributions
Before the SECURE Act, individuals were not allowed to contribute to a traditional IRA when they turned 70 ½ or older. The SECURE Act removed this age limit, allowing individuals to continue making contributions to a traditional IRA as long as they have earned income.
Required Minimum Distribution (RMD) age raised to 72
Under the SECURE Act, the age at which individuals must begin taking required minimum distributions from their traditional IRAs and other retirement accounts has been raised from 70 ½ to 72. This gives individuals more time to grow their retirement savings before they are required to start taking distributions.
Changes to IRA inheritance rules
The SECURE Act made significant changes to the rules for inheriting IRAs. Most notably, it eliminated the “stretch IRA” provision, which allowed non-spouse beneficiaries to stretch out distributions from inherited IRAs over their lifetimes. Under the new rules, most non-spouse beneficiaries must withdraw the entire balance of an inherited IRA within 10 years of the account owner’s death. This change is designed to raise revenue for the government by accelerating tax payments on inherited retirement accounts.
Penalty-free withdrawals for birth or adoption expenses
The SECURE Act allows individuals to take penalty-free withdrawals from their IRAs and other retirement accounts for qualified birth or adoption expenses. This provides new parents greater flexibility to cover the costs of growing their families.
Frequently Asked Questions
Q: What is the Secure Act?
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) is a law passed by the U.S. Congress in 2019 that makes significant changes to retirement savings rules and regulations.
Q: What changes did the Secure Act make to retirement savings rules?
The Secure Act made a number of changes to retirement savings rules, including increasing the age for required minimum distributions (RMDs), allowing long-term, part-time employees to participate in 401(k) plans, and eliminating the maximum age for contributions to traditional IRAs.
Q: What’s its impact on Student Loan Debt?
The SECURE Act expanded the use of 529 plans beyond post-secondary education expenses to include K-12 expenses, as well as allowing tax-free withdrawals of up to $10,000 during a person’s lifetime to pay off student debt.
However, it’s important to note that not all states may provide tax-free benefits for using 529 funds to pay off student loans.
Q: How does the Secure Act affect inherited IRAs?
Under the Secure Act, most non-spouse beneficiaries of retirement accounts must now withdraw the entire balance within ten years of the account owner’s death, a significant change from the previous rules that allowed beneficiaries to “stretch” withdrawals over their lifetimes.
Q: What is the purpose of the Secure Act?
The Secure Act was designed to make it easier for Americans to save for retirement and address some shortcomings in the U.S. retirement system.
Q: To who does the Secure Act apply?
The Secure Act applies to anyone with a retirement savings account, including 401(k) plans, IRAs, and other defined contribution plans.
Q: How does the Secure Act affect small businesses?
The Secure Act includes provisions that make it easier and less expensive for small businesses to offer retirement plans to their employees.
Q: When did the Secure Act become law?
President Trump signed the Secure Act into law on December 20, 2019, and most of its provisions took effect on January 1, 2020.
Q: Do I need to make any changes to my retirement saving plan as a result of the Secure Act?
Depending on your individual circumstances, you may need to make some changes to your retirement savings plan to take advantage of the new rules and regulations introduced by the Secure Act. It’s always a good idea to consult with a financial advisor to determine the best course of action for your specific situation.