The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law by President Donald Trump earlier last December, features a series of provisions designed largely to help Americans prepare for retirement.
As the pension vanishes, more Americans turn towards partially self-sufficient means of preparing for retirement, such as the IRA and the employer-provided 401(k) plan – yet not all are transitioning successfully, and a substantial portion of the country’s aging population has not even begun saving for retirement, let alone generate enough to last for several decades.
Through the SECURE Act, Congress aims to make it easier than ever to get a 401(k), while giving Americans more time to grow their retirement funds. Some consider this new law a critical step in the right direction towards combatting the nation’s retirement crisis.
Few Americans are prepared for retirement. One in five American adults have absolutely nothing saved up for an emergency, let alone retirement, and another 20 percent of the US adult population has only managed to save up 5 percent or less of their annual income. Today’s retiring population – adults aged 65 and up – is in the worst financial shape of any retiring group for decades. And with about 10,000 baby boomers turning 65 every day, it’s a portion of the population that is currently fast growing.
In a number that might shock you, the current median retirement savings of working-age Americans is $0.00 (median, meaning half of the population has more than $0.00 saved up, and the other half is in debt). Even when generously calculating a person’s net worth, roughly 77 percent of Americans simply fall short of retirement savings targets, and about 80 percent have less than a total years’ worth of income saved up.
Two major issues that spring to mind are consumer debt (both revolving debt, such as credit card debt, and non-revolving debt, such as the US’ $1.5 trillion student loan debt) and the overall lack of availability of employer-organized 401(k) retirement accounts, in which only about 40 percent of working-age Americans participate. The SECURE Act aims to alleviate some of these worries by making it easier for employers to offer a 401(k), while giving individuals more time to invest in their retirement.
The first major change made by the SECURE Act is that it increases the age limit for required minimum distributions, or in other words, it allows Americans to save longer. Before the law was passed, Americans aged 70 and a half had to begin withdrawing a specific minimum amount from their retirement accounts.
That amount varies based on different factors. The only exception (now and then) is a Roth IRA, which allows for tax-free withdrawal, but at the cost of non-deductible contributions (in other words, you pay tax when you fund your account, rather than when you withdraw). Because RMDs exist to avoid a tax loophole in traditional retirement funds, Roth IRAs have no such limitations.
These required minimum distributions (RMD) meant that Americans who wanted to work longer and save up for longer had to begin counting on withdrawing a certain amount from their fund or account every year, once they became 70 and a half years old. The SECURE Act amends this rule, allowing Americans to save up an additional 18 months, and turn 72 before they need to begin withdrawing an RMD amount. This is because, statistically, Americans are working (and living) longer.
You can now continue to put away money indefinitely, although you are required to withdraw your RMD from an IRA once you reach age 72, starting 2020. Previously, there was a limit on how long a person could contribute to their retirement account.
However, recognizing that Americans are continuing to work (and giving them ample opportunities to continue to grow their savings well into old age), the SECURE Act removes this age limit.
Currently, roughly half of all working-age Americans have access to an employer-provided 401(k) plan. The SECURE Act aims to increase coverage by making it possible for part-time employees to qualify for a 401(k), provided they worked over 1,000 hours in a year for a given employer, or 500 hours annually for a 3-year period.
Previously, employers could auto-enroll employees into a 401(k) plan, with a 10 percent limit for automatic contributions. With the SECURE Act, employees can still opt out of QACA (qualified automatic contribution arrangement) 401(k) plans, but employers have the option of increasing annual contributions to 15 percent after the first year. By delaying the increased cap until the second year, lawmakers hope to avoid making 401(k) plans unpalatable for employees.
The SECURE Act makes it easier for small business owners to offer 401(k) plans to employees by increasing the tax credit available to small businesses when starting up. This credit was limited at $500 and has been increased to a maximum of $5000. An additional $500 credit is provided for the start-up costs of providing 401(k) and IRA plans with automatic enrollment.
To further make it easier for small businesses to help their employees plan for retirement, the SECURE Act allows small businesses to pool together to finance employee retirement, typically greatly lowering administrative costs for organizing and providing retirement plans. These businesses may be completely unrelated. This provision is effective January 1, 2021.
The big downside to the SECURE Act is that it removes stretch IRAs, by imposing a 10-year-limit on the distribution of a decedent’s IRA. Previously, the spouse of a decedent could pool that IRA into their own, and then pass it onto future generations, effectively stretching it.
The new 10-year-limit is projected to provide over $15 billion in taxes to help finance the other provisions of the SECURE Act. However, there are still exceptions. The 10-year-limit only kicks in for heirs who are 18-years-old or older, and distributions made over the life of a non-spouse beneficiary are still allowed given certain factors, including chronic illness, disability, and more. For spouses, required minimum distributions are still delayed until 72.
The SECURE Act amounts to a step in a marathon, and some critics even argue that it does little to nothing to benefit Americans who are most affected by the current retirement crisis, or young adults who are less than confident in their ability to save for the future.
However, it also contains provisions that help many marginalized groups prepare for not just the long-term, but the immediate future, including part-time workers (a growing statistic), new parents (who may now withdraw $5,000 from their retirement fund penalty-free), and indebted students (with an amendment to §529 plans setting the new withdrawal limit to $10,000).
Because this Act affects so many aspects of retirement, it is wise to consult your financial planner, estate planning professional, or tax advisor when going over your retirement plans to check for new benefits.
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