What is the SECURE Act and How Will It Affect You?

What is the SECURE Act and How Will It Affect You?

January 03, 2020

The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, passed the United States House of Representatives on May 23, 2019. It also passed through the Senate before the end of the year and President Trump signed it into law on December 24, 2019. Containing more than 20 sections, the bill provides greater incentive to American workers to save for retirement.

Changes to IRA and 401(k) Plans

Currently, people who contribute to an Independent Retirement Account (IRA) can only do so until they reach the age of 70 years and six months. The SECURE Act increased the contribution window by 18 months to the 72nd birthday. The same change from 70.5 to 72 years old affects when retirees must begin withdrawing from their IRA accounts. 

Another significant change with the new SECURE Act is that small businesses can now participate in several 401(k) plans at the same time. Employers are eligible for tax credits when they automatically enroll employees in retirement savings plans rather than requiring them to opt in for themselves. With the passage of the SECURE Act, American workers must opt out of employer-sponsored retirement savings plans like the 401(k) if they prefer their employer not automatically enroll them. Other potential benefits include:

  • Increase in the number of situations that allow plan participants to request a withdrawal without incurring a 10 percent penalty. Current exceptions that allow for waiving of the penalty include disability, significant unreimbursed medical expenses, paying for higher education for self or children, and purchasing a home for the first time. The SECURE Act expands this to include new parents with large out-of-pocket costs related to childbirth or adoption costs. The maximum withdrawal of $5,000 must occur within one year of the child’s birth or adoption.
  • A new requirement to initiate withdrawals from inherited accounts within 10 years could lower tax burdens for some people. This will not apply to spouses, disabled or chronically ill individuals, or account beneficiaries less than 10 years younger than the account holder.
  • Employer-sponsored 401(k) plans are now available to more people who work part-time schedules. Eligibility depends on how many hours the part-time employee worked during the year.

Criticisms of the SECURE Act

While the bill received mostly enthusiastic reception, some financial planners fear it doesn’t go far enough to address shortages in retirement savings. It will have little impact on younger workers who cannot currently contribute to retirement savings because they have too many other financial obligations. The fact that many Americans don’t have access to an employer-sponsored retirement savings plan or have enough funds to start their own are major concerns of critics of this bill as well. Others fear the removal of employer liability from accounts including annuities will benefit insurance companies more than investors.

Ultimately, each investor must familiarize themselves with the provisions of the SECURE Act and determine how to use them to his or her advantage.

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The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

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