Will the Secure Act Rescue Retirement?

Congress delivered retirement savers a last minute gift: the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which after passing the House in May, was neatly tucked inside a federal government spending bill that the President will sign just before the holiday break. The changes were the biggest in more than a decade.

The new law comes on the heels of two separate reports that underscore big problems with the state of the nation’s retirement. The Federal Reserve found that a quarter of Americans have no retirement savings at all and the Economic Policy Institute noted that since the Great Recession, a gap has formed “between the retirement ‘haves’ and ‘have-nots.’ Nearly half of working-age families have nothing saved in retirement accounts, and the median working-age family had only $7,800 saved in 2016. Meanwhile, the 90th percentile family had $320,000 and the top 1 percent of families had $1,663,000 or more.”

These numbers amplify a trend that has developed since the U.S. retirement system shifted from employer-funded pensions in the 1980s and 1990s, to 401(k)s, which place the responsibility of saving for retirement onto workers. The big question is whether the Secure Act will address the fundamental problems with employer based contribution plans? The answer is complicated because this law has so many components. While the Secure Act attempts to increase participation, it also allows for companies to use more complicated products and also makes it easier to access retirement accounts in certain instances, which could harm workers over the long term.

So before you shut down for the holidays, here’s a run down of what the Secure Act does, and does not do.

Increases Required Minimum Distribution (RMD) age: Currently, retirement savers are forced to begin withdrawing money from their tax deferred accounts after they turn age 70.5. The Secure Act increases that age to 72 for those who turn 70.5 after December 31, 2019.

Ditches the age cap for traditional IRA contributions: Under current law, if you are over 70 ½ and have wage income, you are prohibited from putting money into a traditional IRA. The Secure Act abolishes the limitation. (There are no age restrictions on Roth IRAs.)

Changes how retirement account balances are reported: Instead of reflecting the total dollars saved, the Secure Act will require plan providers to show how much a retirement account value would create in annual income during retirement.

Makes it easier to include annuities inside retirement plans: Lauded by the insurance industry as a vehicle to create retirement income, critics say annuities can be opaque and expensive. Additionally, companies have been reluctant to offer them in 401(k) plans, due to legal liabilities that could arise. The Secure Act reduces the legal issue, but Barbara Roper, director of investor protection for the Consumer Federation of America, warned that without adequate protections, the addition of annuities into 401(k)s could become a consumer “hellscape.”

Increases Auto-Enrollment: The last big change to retirement rules allowed companies to automatically enroll employees into retirement plans and then increase the contribution to up to 10 percent of annual income. The Secure Act increases the threshold to 15 percent. As previously, employees can choose to opt out.

Expands eligibility for part-timers: Under current rules, people need to work at least 1,000 hours during a calendar year to access most company plans. Starting in 2021, the Secure Act allows those who worked at least 500 hours per year for at least three consecutive years to enroll in retirement plans.

Helps small businesses provide retirement plans: The new law increases a current tax credit for establishing a retirement plan from $500 to $5,000; introduces a second tax credit of $500 for plans that include automatic enrollment; and starting in 2012, makes it easier for small companies of different types to band together to offer a pooled retirement plan to their employees.

Waives 10 percent penalty for new baby and adoption costs: The Secure Act allows parents under the age of 59 ½ to tap retirement accounts ($5,000 per individual and $10,000 for married couples) up to a year after a baby is born or adopted, without incurring the usual 10 percent early-withdrawal penalty. Those who take advantage of this feature will still have to pay income tax on the distribution amount and can put the money back into the account later.

Eliminates “Stretch” RMDs: Current IRS rules allow non-spouse beneficiaries of IRA accounts to “stretch” distributions from an inherited account over their own lifetimes. Under the Secure Act, the stretch RMD is gone. If you are a non-spouse and inherit an IRA or 401(k), you will (with some exceptions) have to take the money out of the account, and pay the taxes due at your income tax bracket at the time, within 10 years of the retirement account owner's death.

Expands the use of 529 money: The Secure Act added a non-retirement item: Anyone with 529 education savings accounts can take tax-free withdrawals of as much as $10,000 for repayments of some student loans.