The SECURE Act 101
Passed at the end of 2019, the SECURE Act aims to reduce the effects of the looming retirement crisis facing millions of Americans. Longer life expectancy, lack of resources and complicated laws mean many Americans don’t have enough saved for retirement. The Act attempts to reverse this trend through additional tax credits, relaxing certain rules, extending contribution limits and increasing retirement account options.
With people both living longer and having fewer options for retirement plans than previous generations, the SECURE Act hopes to make saving for retirement more affordable while increasing access to retirement plans for millions of people.
Whether you are directly affected by the Act or not, it is important to understand what the SECURE Act is and how saving for retirement should be a financial priority.
While planning and saving for retirement is important, it isn’t always possible for many Americans. Lack of financial resources, inadequate retirement education, or unexpected life circumstances can get in the way. And when it comes time to retire, many people find themselves unprepared.
To help combat these problems, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This guide will dive deeper into what the SECURE Act is, how it works, and how it may impact your retirement savings.
What Is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a bill signed in December 2019 to help and encourage Americans to save for retirement.
With the purpose of improving the prospects of Americans facing a potential retirement crisis, this bill aims to make it easier for small businesses, the self-employed, and those with longer life expectancies to be able to save for retirement.
How the SECURE Retirement Act Works
Traditional IRA owners can now make contributions to their accounts if they have earned income past age 70 (Roth IRA accounts always had this option available).
Giving birth or conducing a qualified adoption is now eligible for up to $5,000 of hardship withdrawal from employer plans or IRA’s allowing owner to avoid the usual 10% penalty (would still owe regular income tax if money is tax deferred).
For anyone turning age 70.5 AFTER 12/31/19 the RMD age is now 72 NOT 70.5 for both employer plans and IRA’s.
Note the following rules that were already in existence still apply: IRA distributions must be taken separately from 403b or 401k RMD’s. 403b RMD’s can be aggregated together and taken from one 403b if a client owns multiple (similar to how IRA’s work) but 401k RMD’s must be taken separately from each individual 401k that is owned (a great reason for consolidation of old accts) and Roth 401k/403b plans DO have RMD’s but Roth IRA’s do not have RMD’s.
Beneficiaries who don’t meet certain new requirements must take Bene-IRA RMD’s over the 10 next years instead of having the ability to stretch distributions over their lifetime. Note that some beneficiaries who do meet the new requirements will still have the option for lifetime stretching of distributions from the account still.
There will be more options being provided in employer plans for lifetime annuitized income based on assets held in that plan.
The SECURE Act also affects some components of the Tax Cuts and Jobs Act, which raised taxes on benefits that family members of veterans who have passed away were receiving, as well as some Native Americans and students.
So how will the costs of these changes be covered? By removing the stretch IRA planning and estate strategy that allows non-spouse beneficiaries to spread payment disbursements from the money they have inherited over the course of their lifetime. By limiting these disbursements to within ten years of the passing of the original account holder, approximately $15.7 billion can be saved to pay for the changes within the SECURE Act.
Why the Need for the SECURE Act?
Given that many people are living longer, and taking into account the rate of inflation, most experts recommend saving at least $1 million for retirement by the time an employee plans to stop working.
While Americans may have access to 401(k) retirement plans, few are able to take advantage of traditional pension plans, according to the U.S. Department of Labor.
Another problem with the current retirement system is that employers have moved away from a defined benefit plan model. Under these plans, an employer guarantees payment to employees after they retire through defined contribution plans. Essentially an employee saves on their own for retirement, and the employer still contributes a set amount.
Typically, contributions are withdrawn from the employee’s paycheck and the balance can grow tax-free until it is withdrawn during retirement. The age at which the money must start being withdrawn is known as the required minimum distribution, or RMD. The SECURE Act raises this age from 70 ½ years to 72.
Retirement Looking Bleak for Many
According to a report published by CNBC, a staggering 22% of Americans have less than $5,000 saved for retirement. Around 5% have between $5,000 and $24,999, and only 16% have more than $200,000 saved.
Even more worrisome is that 46% of the respondents don’t know how much they have saved for retirement. Sadly, of baby boomers aged 55 to 73 years and about to enter into retirement, 17% have less than $5,000 saved for retirement.
Worse, many Americans with inadequate retirement savings realize they will outlive their savings, but aren’t planning on doing much about it.
When it comes to retirement, one of the best things you can do is start saving early. If you have access to an employer-based retirement plan with an employer match to your contributions, it is crucial to fund these accounts with the maximum contributions allowed by law.
You are essentially leaving free money on the table by not utilizing these plans to the fullest. Considering how much the money will compound over time, the difference in account savings balances when you start saving in your 20’s instead of in your 50’s is astounding.
If you haven’t yet maximized these plans and you’re nearing retirement, it is never too late to start saving, no matter what your age.
If you’re worried that saving for retirement will cost you too much each month, start by thinking about how much you spend on coffee each day or eating out each week. Consider moving $25 a month from one of these budgets into a retirement account and you’ll be amazed at how much you can save.
If you’re ready to talk to a wealth management professional, fill out the contact form here for a free consultation on how to get started on a new plan for your retirement.