December 19, 2019

Edited 05/14/20

The SECURE Act: What is it and how it affects retirement planning?

The SECURE Act – possibly the most significant retirement reform legislation of the last decade passed both the Senate and House this week. Having languished in the Senate for months after the House passed the measure in May, the bill was included as part of a government spending package for 2020.

What is the SECURE Act of 2019?

The SECURE Act stands for Setting Every Community Up for Retirement Enhancement. This act provides more incentives to save during retirement with tax-deferred benefits. The SECURE Act eliminates age restrictions to participate in retirement plans, increases the age for Required Minimum Distributions (RMDs), and allows small businesses to offer 401(k) plans.

How does the SECURE Act change my retirement plans?

The SECURE Act contains many popular measures designed to help Americans prepare for retirement including the following important provisions:

  • Increasing Age for Beginning Required Mandatory Distributions: The Act increases the required minimum distribution age from 70½ to 72. This change will provide up to two extra years for your money to grow tax deferred in qualified accounts such as IRAs and 401(k) plans before you are required to withdraw it.
  • Eliminating prohibition on traditional IRA contributions for those over 70 ½: Many people are working beyond age 70 today, either by choice or out of necessity. With the restriction on contributions to traditional IRAs lifted, workers in their 70s will continue to have the opportunity to take advantage of the benefits of saving in tax-deferred accounts until they are ready to retire or even in retirement. That’s more time to build the nest egg to support an increasingly longer life in retirement.
  • Allowing Part-time Workers to Participate in 401(k) Plans: Currently, part-time employees (those working less than 1,000 hours per year) are not able to participate in company 401(k) plans. The SECURE Act changes this by allowing employees working at least 500 hours a year for three consecutive years to participate in a company plan. Allowing part-time employees to contribute to employer sponsored plans is particularly important both to women, who have part-time employment rates 3-5 times higher than similarly situated men, and older workers who often shift from full-time to part-time status or return to work at less than full-time. With the growing trend of part-time work during retirement, this will enable retirees to continue to save.
  • Increased Ability for Small Employers to Offer Retirement Plans: The SECURE Act also permits small employers to band together to form one retirement plan (called a multiple employer plan or “open MEP”). It is estimated that open MEPs would result in the formation of 600,000 to 700,000 new retirement accounts.

Why are Stretch IRAs going away with SECURE Act?

In order to pay for these new measures, the SECURE Act will eliminate the so-called “stretch” IRA. Currently, younger beneficiaries – for instance, children or grandchildren – are allowed to take RMDs from an inherited IRA based on their own, much longer, life expectancy. This allows them to “stretch” the time for their distributions which provides decades of tax-deferred growth in the IRA. However, under the new rules, most IRA beneficiaries (other than a spouse) will be required to deplete the entire inherited IRA within 10 years which will push higher RMDs into the prime working years – and highest tax years – of a beneficiary’s life. This change alone is estimated to result in a $16 billion increase in tax revenue. Anyone who has set up trusts or made estate planning decisions based on the stretch IRA provision should review their current plan in light of this change.

When will the SECURE Act Take Effect?

While some provisions of the SECURE Act will be delayed (such as new rules for part-time employees and open-MEP plans), many important provisions, such as those governing RMDs and stretch-IRAs, will be law in just about two weeks. This means that very soon many Americans will be facing new rules around RMDs, IRA contributions and stretch IRAs.