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The SECURE Act and Your Retirement

December 3rd, 2019

How much have you saved for retirement? If you answered, “Not enough,” you’re not alone. According to Northwestern Mutual’s Planning and Progress Study 2019, 22 percent of Americans have less than $5,000 stashed away for retirement. Another 15 percent have no retirement savings at all. Fortunately, new legislation designed to make saving easier is currently working its way through Congress.

Known as the SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, H.R.1994 was passed by the House of Representatives in May 2019 with overwhelming support. Many of its 29 provisions are tax-payer friendly and intended to help Americans boost their retirement savings. While not all of the act’s changes will affect everyone, there are several provisions which will impact many savers.

Required Minimum Distributions (RMDs)

People are living longer than they did a generation ago, putting many retirees at risk of outliving their savings. The SECURE Act will address this issue by changing the age at which you must begin drawing funds from a 401(k) plan or IRA from 70.5 to 72 years old. This gives savers an additional 18 months to take advantage of the tax benefits provided by these retirement accounts and should help stretch savings out longer.

IRA Contribution Age Restrictions

Currently, you cannot contribute funds to a traditional IRA if you are 70.5 years old or older. The SECURE Act will eliminate this rule, enabling savers to sock money away in their traditional IRA for as long as they want to regardless of age. We think it’s a significant change, as the study we mentioned earlier found 18 percent of Baby Boomers expect to work past the age of 74.

Employer-Sponsored 401(k)s for Part-Timers

Under current laws, employees who work less than 1,000 hours per year cannot participate in employer-sponsored 401(k) plans. This makes it much harder for part-time workers to save for retirement. The SECURE Act aims to eliminate this issue by guaranteeing 401(k) eligibility to part-time employees provided they have worked at least 500 hours per year for three or more consecutive years.

Annuities and Lifetime Income Options for 401(k)s

The SECURE Act will make it easier for employer-sponsored 401(k)s to offer annuities and other lifetime income options to employees and allow employees to roll over existing 401(k) annuities without paying surrender fees should they change jobs. Additionally, the act will require plan administrators to provide annual lifetime income disclosure statements to participants, not just their 401(k) balance. This change should make it easier for many savers to evaluate how much money they’ll have to live on each month once they retire.

Higher Automatic Contribution Rates for Employer-Sponsored 401(k)s

Under the Qualified Automatic Contribution Arrangement (QACA), employers are able to automatically enroll eligible employees in 401(k) plans and set automatic contribution rates up to 10 percent per year. While employees can opt-out of enrollment, studies have shown that most don’t, which effectively increases the number of workers saving for retirement. The SECURE Act will increase the cap on automatic contribution rates to 15 percent per year, enabling employers to offer their workers the ease of greater automatic retirement contributions.

Retirement Plans for Small Business Employees

Historically, many small businesses have been unable to afford to offer their employees retirement plans such as employer-sponsored 401(k)s. The SECURE Act will try to change this by increasing the tax credit available to small businesses who set up a retirement plan from $500 to $5,000 and creating a new $500 tax credit towards start-up costs for 401(k) and IRA plans that include automatic enrollment.

Of course, before any of this can happen, the SECURE Act must be passed by the Senate and signed into law by the president. As of late November 2019, the legislation is stalled. While some pundits say it’s still possible it may pass in fiscal year 2020, Senators may make changes to the law once it gets to the floor. But regardless of the timeline, we expect the SECURE Act to eventually make saving for retirement easier for countless Americans.