Asad Gourani, CFP®
The SECURE Act: What You Should Know
Updated: Jan 18, 2021
Earlier last week, the House of Representatives passed the Secure (Setting Every Community Up for Retirement) Act bill. This bill will still have to pass in the Senate to be sent to the President’s desk where it can become law.
This bill would bring about the most significant change in retirement plans since the passing of the Pension Protection Act of 2006. The entire goal of this new bill is to make it simpler for people to save for retirement and for employers to offer retirement plans to their staff. Of course, there are going to be both advantages and disadvantages to the proposed bill.
Understanding the new Secure Act bill is important because it has the potential to drastically impact your retirement savings plan. Here are a few of the top provisions that you need to know about this act. Advantages
Most people want to hear the positive things that this act will bring about first. While some disadvantages do exist, there are plenty of beneficial provisions included with this new proposition.
Age Limit Contributions Eliminated
Under the current system, there is an age limit on IRA contributions. Contributions made after the age of seventy and a half are not allowed. However, this age limit would be eliminated with the Secure Act. This allows individuals to continue funding their retirement account until they are completely ready to tap into these funds.
Require Minimum Distributions Raised
Along with the eliminated age limit, the required minimum distributions would be changed from age seventy and a half to age 72. This means that you have a few more years before you are required to begin tapping into your IRA. The higher minimum distribution age allows you to add more funds to your account and potentially allows those funds to see you through a few more years while they accumulate interest. The difference in age could make a substantial impact in the compounded interest that you see within your IRA, allowing you to live a bit more comfortably in retirement.
More Availability of Retirement Plans
One of the most significant changes under the Secure Act is the wider availability of retirement plans. Long-term part-time workers would now be allowed to participate in an employer’s 401(k) plan. This is a significant shift from how retirement plans were offered in the past, and it would make a retirement savings account more accessible to the general population.
Small employers with fewer workers will also have more access to retirement plans that they can offer to employees. Under the new act, small employers would be permitted to come together to offer multiple-employer plans. This can reduce the out-of-pocket costs and administrative fees associated with retirement plans that makes them unaffordable for many small employers to offer on their own.
New Tax Credit
Who doesn’t love the idea of a new tax credit? The bill introduces a new tax credit of $500 for automatic enrollment. The goal of this tax credit is ultimately to assist smaller employers to encourage automatic enrollment into their retirement plans and reduce the initial costs of offering a plan to employees. Furthermore, automatic enrollment tends to increase participation in the available retirement plans.
While many of these advantages seem like good ideas, there are still drawbacks to the proposed bill. Taking a closer look at some of these disadvantages can be important if you want to have a well-rounded understanding of the Secure Act.
Repeal the Stretch IRA
One of the provisions of the Secure Act is set up to repeal the Stretch IRA. Under current law, the beneficiary who inherits an IRA account may choose to have the balance distributed based on his or her life expectancy. This choice helps in compounding assets on a tax-deferred basis over a longer period of time. In contrast, the proposition of the new bill would require an inherited IRA to be distributed within just ten years of the original owner’s death.
Boosts Sales of Annuities
The new bill is set to boost the sales of annuities inside of 401(k) plans offered by employers. It intends to switch the responsibility of selecting annuities that are right for the employees from the employer to the insurer. This switch in responsibility is not inherently bad by itself. However, it does push an expensive illiquid tax deferred products into an already tax deferred account.
The Plan Is Not final yet
While the House of Representatives worked to pass the Secure Act, the Senate had a different bill to tackle retirement issues known as RESA. The two plans are not identical, but it is possible that they may influence one another. Some of the features from RESA may make it into the Secure Act or vice versa. Regardless of which bill passes and its influence on the other, the bill could still bring about the most significant changes for retirement savings that we have seen in a very long time.