What is the SECURE Act? How Could It Affect Your Retirement?

Traditional pensions are on the decline in the United States of America, and most citizens are tasked with the responsibility of saving up towards their retirements. Relying heavily on 401(k) plans and IRAs, the retirement sphere is in shambles. This is because an expected one-fourth of working Americans have no retirement savings, including 13% workers aged 60 or above. However, help might just be on the way with the SECURE Act.

What is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, is an act that has been passed by the House of Representatives on May 23, 2019. In nature, the SECURE Act seeks to address the manner in which money is saved for retirement, with most of the proposed changes being tax-payer friendly and designed to boost savings.

In other words, it aims to improve the nation’s current retirement system. According to Chad Parks, founder and CEO of Ubiquity Retirement + Savings, “This is a stepping stone to try to solve that looming retirement crisis”, and the goal of the act is “to incentivize businesses to put [plans] in place”.

What are the implications of the SECURE Act?

According to the U.S. Bureau of Labor Statistics, only 55% of the adult population participates in a workplace retirement plan. 

There is no doubt that the nation’s retirement system needs some major changes, and the SECURE Act intends to bring about these very changes. With a set of 29 provisions aimed at helping employees save up towards their retirement, and preventing older Americans from outliving their assets, the secure Act is all geared up to be a much-needed step towards securing the life of retirees. Besides offering significant tax advantages, the Act also encourages employers to start offering retirement plans by making them less expensive and easier to administer. 

How can the SECURE Act affect your retirement?

The SECURE Act could help pave the way for a more secure future for you. Here’s how:

RMDs starting at age 72

Currently, Required Minimum Distributions (RMDs) from 401(k) plans and IRAs must begin in the year when you turn 701/2. The SECURE Act pushes this age to 72, which means that you could add retirement funds for an extra 11/2 years before having to tap into them. This would result in a boost in retirement savings for a lot of seniors. 

No age restrictions on IRA contributions

One arcane rule that the SECURE Act proposes to repeal is that you cannot contribute to a traditional IRA if you are aged 701/2 or above, as is the case presently. If, and when, the SECURE Act is enacted, it would allow you to put money in a traditional IRA for as long as you work, well past your 70s and beyond.

401(k)s for part-time employees

Presently, employees who haven’t worked for a minimum of 1,000 hours in a year aren’t allowed to participate in their employer’s 401(k) plan. This makes it extremely difficult for part-timers to save towards retirement. However, the SECURE Act guarantees 401(k) eligibility to employees who have worked a minimum of 500 hours per year for three consecutive years or more. The only condition is that the employee should be 21 years old by the end of his/her three-year period.

Penalty-free withdrawals for birth or adoption

The SECURE Act would let you withdraw up to $5000 following the birth or adoption of a child, without having to pay the usual 10% early withdrawal fee. Moreover, if you are married, each spouse can withdraw the $5000 from their account, without paying the penalty. Now, while using funds would deplete the retirement savings, it would also encourage youngsters to start funding their 401(k)s and IRAs much earlier, leading to a larger amount for when they retire.

Allowing More Annuities

The SECURE Act, if enacted, would require 401(k) plan administrators to provide annual ‘lifetime income disclosure statements’.These statements would help plan participants get a better understanding of what their monthly takeaway will be once they stop working. In other words, it will let you know how much money you could be getting if your entire 401(k) balance was used up to purchase an annuity. Moreover, the Act would also make it easier for 401(k) plan sponsors to offer annuities and other ‘lifetime income’ options to participants by taking away some of the associated legal risks. For instance, if you were to leave your current job, you could roll over the existing 401(k) annuity you previously had, to another 401(k) or IRA without having to pay any surrender fees. 

Enhancement of Auto-Enrolment 401(k) Plans

Currently, under the Qualified Automatic Contribution Arrangement (QACA) plan, an employee’s contribution rate begins at 3% of their annual pay and increases with each year that the employee stays with the plan. However, an employer cannot set a contribution rate exceeding 10% a year. The SECURE Act wants to push this cap to 15% each year except for an employee’s first year of participation. This would mean that employers could put more money into their employees’ retirement accounts while keeping initial contributions in-check.

Assisting Small Businesses Offer Retirement Plans 

If your employer doesn’t offer a retirement savings plan, the onus of saving towards old age would fall solely on you. In the present scenario, small businesses often find it difficult to have retirement plans in place for their employees. The SECURE Act has three provisions to help small businesses offer retirement plans to their employees. First, it proposes to increase the tax credit available for 50% of a small business’ retirement plan start-up costs from $500 a year to $5000 a year. Second, the Act would create a new $500 tax credit for the start-up costs for new 401(k) and IRA plans that include automatic enrolment. This would help small businesses to join together and offer retirement plans to their employees.

To sum it up

Ultimately, the SECURE Act is likely to be passed in the Senate too, though it might go through some minor changes in the process. However, there is no doubt that it will still be a game-changer that makes lives easier for countless retirees all across the nation. Let us just hope that the Act doesn’t get held up in the Senate for too long.

If you are finding it difficult to save towards your retirement and need help with investment options, consult top financial advisors today.