Understanding the SECURE Act Basics

Passing the SECURE Act was a bipartisan effort aimed at making it easier for certain individuals to save for retirement. Americans notoriously struggle to save, whether planning for emergencies or retirement income. Inflation will make retirement costs even more difficult to afford in the future. The Social Security Administration admits that benefits are expected to start running out by 2037, just over a decade away, and company pensions are rapidly disappearing. 

Combine all of that with the fact that the average working American has just $98,800 saved, according to Northwestern Mutual, but realistically needs at least $1 million to retire comfortably, and it’s easy to see the edge of the cliff. The SECURE Act was designed to help make retirement savings more accessible for many Americans, as well as to improve the country’s overall retirement planning efforts.

What is the SECURE Act?

Enacted on January 1, 2020, by then-president Donald Trump, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 is one of the largest retirement reforms of this generation.

It impacts many future retirees with certain defined-contribution plans such as 401(k) and 403(b) accounts. It also modifies the requirements for many employer-provided retirement plans as well as individual retirement accounts (IRAs) and certain tax-advantaged savings accounts. This includes redefining eligibility for part-time employees, modifying tax credits for small businesses, and shifting the age for required distributions in retirement.

SECURE Act Key takeaways & provisions

Much is different now that the SECURE Act has been passed. The new bill:

• Allows various retirement benefits to be provided to long-term, part-time employees.
• Improves 401(k) eligibility for part-time employees by providing tax credits and protections to small business owners who offer collective Multiple Employer Plans.
• Allows for penalty-free withdrawals from a 529 education savings plan, up to $10,000 when the money is used to repay certain student loans.
• Raises the required minimum distribution age from 70½ to 72.
• Eliminates the retirement contribution age limit, previously set at 70½.
• Allows employees to withdraw up to $5,000 from a retirement plan to cover the birth or adoption of a child, penalty-free.
• Removes the inherited IRA stretch benefit, which allowed non-spouse IRA beneficiaries to spread their disbursements out over their lifetime (now the limit is 10 years from the original account owner’s death).
  

What are the benefits of the SECURE act?

Here’s a look at some of the key changes for today’s savers.

SECURE Act 401(k) changes

The SECURE Act makes it easier for many disadvantaged Americans to contribute to a 401(k) retirement plan.

• The act makes it easier for employers (especially small businesses) to offer various retirement benefits to long-term, part-time workers.

  This is accomplished by offering a range of tax credits and protections to those businesses, as long as they offer collective Multiple Employer Plans. Previously, many of these employees would have been unable to access tax-advantaged retirement plans and other key benefits.

• Employees are now able to contribute to their various retirement accounts for longer.

  Whereas the retirement contribution maximum age was originally 70½, employees can now contribute to these accounts indefinitely. As long as employees are working and remain eligible for the retirement plan in question, they can continue adding funds to the account.

• Employees can now withdraw up to $5,000 from their 401(k), penalty-free.

  This is to help cover expenses related to the birth or adoption of a child. Previously, these funds could only have been withdrawn penalty-free if they involved qualifying medical expenses, employees applied for a hardship withdrawal through the IRS, or they were over the age of 59½. Income taxes will be due on the withdrawal if it is not repaid, however.

SECURE Act 529 changes

When it comes to 529 educational savings plans, the SECURE Act offers an added benefit. Now under the act, individuals can withdraw funds from their 529 plan without any penalty, as long as the money is being used to repay eligible student loans or cover tuition for registered apprenticeship programs.

This withdrawal has a lifetime limit of $10,000 per account beneficiary, as well as a $10,000 lifetime limit for each of the beneficiary’s siblings.

SECURE Act IRA contribution changes

With the passing of the SECURE Act, those saving for retirement will also see benefits related to their individual retirement accounts, or IRAs. In addition to being able to contribute to an IRA indefinitely—contrary to the previous maximum contribution age of 70½—up to the annual contribution limit, future retirees also don’t have to start taking required minimum distributions (RMDs) quite as early.

Under the new law, IRA account owners are not required to take RMDs until age 72. This is a year-and-a-half longer than the previous requirement age of 70½. This law applies to traditional IRAs, SEP IRAs, and SIMPLE IRAs. For Roth IRA account owners, nothing has changed regarding distributions: Withdrawals still aren’t required until after the death of the owner.

As with 401(k)s, IRA owners are also able to now withdraw up to $5,000 to put toward expenses related to the birth or adoption of a child. These eligible withdrawals can be made penalty-free, but will be subject to income taxes if not repaid.

What are the downsides of the SECURE act?

The SECURE act changed the way inherited IRAs work for beneficiaries, which can come with impactful tax consequences.

SECURE Act inherited IRA changes

One other IRA change to note is regarding inherited IRAs. Previously, beneficiaries of an IRA account were able to stretch out their withdrawals over the course of their lifetime. Under the SECURE Act, however, beneficiaries will need to withdraw the entire balance within 10 years of the original account owner’s death.

There are no RMDs related to this rule, so beneficiaries can make as many or as few withdrawals as they’d like in that 10-year period. However, this requirement means that many beneficiaries will now need to make their total withdrawals over a shorter period of time. That will not only impact the potential growth of the account, but withdrawals will also be subject to income taxes. If the beneficiary is in a higher income stage of life, these added taxes can be significant.

What are the effects of the SECURE act?

Now that you see what the SECURE Act did, how will it affect you and those around you?

• Retirement savers can save for longer.

  Thanks to the elimination of contribution age maximums and an extended RMD age (from 70½ to 72), future retirees can save longer—and potentially put away more money—for their retirement. New parents can access much-needed withdrawals. Parents who give birth to or adopt a new child can utilize their retirement savings plans to cover up to $5,000 in expenses, without penalty.

• IRA beneficiaries will need to act faster.

  If you inherit an IRA and are not a surviving spouse, you’ll be required to withdraw the funds faster than before. Rather than strategically taking distributions, the total balance will have to be withdrawn within 10 years of the owner’s death. This could have notable implications regarding balance growth and personal income taxes.

• Small businesses can provide benefits for their employees.

  Some small businesses and startups struggle to provide competitive benefits to employees, especially when it comes to retirement accounts. Thanks to this new law, small businesses can enjoy tax breaks and protections so they can provide better benefits for their employees, even those who have worked part-time.

The bottom line

Retirement in America is a concerning topic, especially with the impending collapse of Social Security and the rapid disappearance of pensions. Many of today’s employees aren’t saving enough to support a comfortable retirement, which will be a serious issue in the years to come.

The SECURE Act aims to correct some of these issues and help less-advantaged Americans save more now. Thanks to added benefits, business incentives, and extended savings periods, the hope is that our country can do better to plan for our individual (and collective) futures.

But before you go: Try Titan’s free Retirement Calculator to project how much you'll need in retirement.‍