What Is the SECURE Act and How Could It Affect Your Retirement?

The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, which originally passed the House in July, was approved by the Senate on Dec.19, 2019, as part of an end-of-year appropriations act and accompanying tax measure, and signed into law on Dec. 20 by President Donald Trump. The far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.1

KEY TAKEAWAYS

• The SECURE Act became law on Dec. 20, 2019.
• The SECURE Act will make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer.
• Many part-time workers will be eligible to participate in an employer retirement plan.
• The Act pushes back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72, and allows traditional IRA owners to keep making contributions indefinitely.
• The Act mandates that most non-spouses inheriting IRAs take distributions that end up emptying the account in 10 years.
• The Act allows 401(k) plans to offer annuities.

A Troubled Retirement System

That there’s trouble brewing in the U.S. retirement system, which requires most workers to supplement Social Security with personal savings, has been widely acknowledged.

According to data from the U.S. Bureau of Labor Statistics published in 2018, only 55% of the adult population even participate in a workplace retirement plan. And even those who do are often woefully behind when it comes to investing part of their paycheck.

The wealth management giant Vanguard, for instance, revealed early in 2019 that the median 401(k) balance for those ages 65 and older is just $58,035. The SECURE Act aims to encourage employers who have previously shied away from these plans, which can be expensive and difficult to administer, to start offering them.

“With [the] passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” Rep. Richard E. Neal (D-Mass.) said in a statement after the bill sailed through the House in May.

Tangled Up in the Senate

Despite the SECURE Act’s overwhelming support in the House, it didn't get through the Senate until it was attached to the appropriations and tax-extender bills that passed the day after President Trump was impeached in the House of Representatives.

In early July, PlanAdviser reported that two Republican senators—one of them Ted Cruz (R-Texas)—were holding it up. According to a Washington insider, Cruz was trying to tweak the section on 529 accounts so that parents can use them for home-schooling expenses as well.2

In October, PLANSPONSOR quoted Chris Spence, TIAA’s senior director of government relations, as saying the bill has been sitting "in something like legislative limbo." 3 Along with Cruz, two other senators—Mike Lee and Pat Toomey—had reservations about some technical points. Spence was optimistic and predicted correctly that the route to passage could be through being attached to a broader bill that has to be passed by the end of 2020.

Major Provisions of the SECURE Act

The SECURE Act tweaks a number of rules related to tax-advantaged retirement accounts. Here's what it will do:

• Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
• Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
• Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
• Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
• Push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72, for those who are not 70½ by the end of 2019.
• Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).
• Permit penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.
• Encourage employers to include more annuities in 401(k) plans by removing their fear of legal liability if the annuity provider fails to provide and also not requiring them to choose the lowest-cost plan. (This could be something of a double-edged sword. Employees will need to look extra-carefully as these options.)

One other key change in the new bill is paying for all this: the removal of a provision known as the stretch IRA, which has allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules will require a full payout from the inherited IRA within 10 years of the death of the original account holder, raising an estimated $15.7 billion in additional tax revenue. (This will apply only to heirs of account holders who die starting in 2020.)

Planners Evaluate These Changes

While retirement planner Marguerita Cheng, CEO of Blue Ocean Global Wealth cautions that the bill is far from a cure-all for the nation’s retirement challenges, she says several of the provisions represent a step in the right direction.4

In particular, she notes, reducing the number of hours that employees are required to work in order to sign up for 401(k)s can help expand participation. “That’s helpful for part-time employees, whether they’re just entering the workforce or about to leave,” Cheng says.

And she’s in favor of adding flexibility to 529 accounts, which could be used to repay some student loans under the bill. That’s a good option, she says, for parents who may have funds remaining in an educational savings account and want to help a child who has already graduated. “The SECURE Act provides more flexibility,” says Cheng.

For David Rae, a financial planner based in Los Angeles, moving the starting age for required minimum distributions to 72 also makes sense, given that people are living longer than they did a generation ago. “Pushing back RMDs will help people make their money last just a little bit longer, especially since more of them need to work later,” Rae says.

Impact on IRAs

The SECURE Act's impact on retirement accounts like IRAs and 401(k)s will be significant. Eric Bronnenkant, CPA, CFP®, Head of Tax at Betterment, outlines what will change and how it will impact savers.

Inherited IRAs: The parts of the SECURE Act that will most immediately impact average Americans are its new guidelines around inherited IRAs. So let’s say you inherited a retirement plan like an IRA or a 401(k) as a non-spouse beneficiary. Under the old rules, you were able to withdraw from that retirement account over the rest of your life, but under the SECURE Act, you’ll have to take that money out within 10 years. So basically, through the SECURE Act, you’re compelled to pay taxes sooner. Those who saved a lot of money in their 401(k) or IRA, and hope to leave that money to a non-spouse beneficiary, might want to rethink their strategy on who they choose as a beneficiary, recognizing this new, shorter timeframe.

IRA Contributions: The SECURE Act will also impact traditional IRA contributions. Under the old rules, you had to be under age 70 ½ in order to contribute to a traditional IRA, but under the SECURE Act, anybody of any age can make a traditional IRA contribution. Of course, you still need to be able to demonstrate earned income (like from working at a job or self-employment), but before the SECURE Act, if you were 85 years old and still working, you wouldn’t have to be able to contribute to a traditional IRA. Now, you’ll still be able to contribute, no matter what your age: workers over age 70 ½ can now make traditional IRA contributions, which also potentially allows them to make backdoor Roth IRA contributions. 

Impact on Student Debt

The SECURE Act will also allow people to withdraw up to $10,000 during their lifetime from their 529 plans, tax-free, in order to pay off their student loan debt. Originally, 529 plans were strictly for post-secondary education expenses. Their use expanded to include K-12 expenses. Now, under the SECURE Act, 529 funds can be used to pay off college debt. That said, not all states may allow the student loan benefit to come out tax-free at the state level. (For example, New York was non-conforming on K-12 expenses. Now, the state is examining the student loan level, but haven’t yet made a decision.)

The Bottom Line

Whether the SECURE Act ends up being a retirement game-changer or not remains to be seen. But one thing is abundantly clear: The current rules aren’t allowing nearly enough Americans to put away the nest egg they’ll ultimately need for a secure retirement.

1. Congress.gov. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019." Accessed Dec. 19, 2019.
2. PLANSPONSOR. "SECURE Act Ensnared in Senate After Flying Through House." Accessed July 11, 2019.
3. PLANSPONSOR. "Congressional Leaders Want SECURE Act Passage in 2019." Accessed July 11, 2019.
4. Cheng, 2019.