After spending several months languishing in an uncertain fate, the SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, just squeaked through Congress and a Presidential signature less than 2 weeks before the end of 2019.
While the Act contains dozens of provisions, let’s focus on a few major categories, what they do, and why they were included in the Act.
Employer Retirement Provisions
One of the main focuses of the SECURE Act is to make retirement accounts available to more Americans. Several provisions included in the Act make it less expensive and easier for small businesses to run a defined contribution plan such as a 401(k) plan. Defined contribution means just that: the contributions to the account are specified. This is opposed to defined benefit plans, also known as pensions, which are largely unheard-of these days.
Let’s get more specific about two small business 401(k) incentives:
- Employers who create a 401(k) or SIMPLE IRA with automatic enrollment can get an annual tax credit of up to $500
- Automatic enrollment plans are incentivized by this Act
- Small businesses will no longer be as liable if an annuity provider fails on its obligations
If these incentives work as intended, more small businesses will offer 401(k) plans to employees, increasing national retirement coverage.
Another important provision for businesses is that part-time employees can now be eligible for a 401(k) if they worked 1,000 hours in a year or 500 hours for each of the last 3 years.
Individual Retirement Provisions
There are also several provisions designed to incentivize retirement savings for individuals by making them more flexible:
- SEP and SIMPLE IRA plans have what’s called Required Minimum Distributions (RMDs). Savers were required to take distributions from their retirement accounts starting at age 70 ½. The age has now been pushed back to 72, allowing savers more time for their nest egg to grow before withdrawing the funds.
- Also, there used to be a maximum age to contribute money to a traditional IRA, which was 70 ½ years old. This maximum age has been completely eliminated.
- Normally, pulling money from a retirement account incurs a harsh penalty. There have been exceptions in place for a while, like pulling money in order to buy a house. With the SECURE Act you can now pull up to $5,000 penalty-free for childbirth or adoption expenses.
There’s also a provision that makes 529 accounts (education savings plans) more flexible: you can now use up to $10,000 of a 529 account each year for qualified student loan payments.
Note that there is one major rule that is becoming less flexible:
- When a non-spouse inherits an IRA, it used to be that the beneficiary could “stretch out” IRA distributions over their expected lifespan. This is no longer the case. Now, people who inherit an IRA must take the entire distribution over a maximum of 10 years. This provision is meant to boost tax revenue to the IRS by accelerating tax collections on retirement distributions.
TL;DR: The US Government is realizing that many Americans have been missing out on quality options for retirement savings. The SECURE Act is meant to incentivize far more of us to establish retirement accounts, while paying for these incentives with the elimination of the “stretch IRA.”