There is good news if one of your New Year’s resolutions is to save more for retirement. During the same week that a brutal political battle over impeachment made headlines in Washington in December, you may have missed the story that both Republicans and Democrats came together and passed a bill making it easier for millions of Americans to save for retirement.
It is the first major legislation in Congress aimed at improving retirement security in more than a dozen years. Called the Setting Every Community Up for Retirement Enhancement Act, or the “SECURE Act,” it gives more American workers access to 401(k)s, which have proven to be a valuable tool for those striving to prepare for retirement.
Americans have used these accounts to accumulate nearly $11 trillion in assets, but nearly half of private sector workers do not have access to an employer-sponsored retirement plan. That’s in part because small businesses find them expensive and cumbersome to set up and administer.
The SECURE Act includes tangible incentives for business owners to establish retirement plans, including increasing the small business tax credit for starting a new 401(k) plan tenfold. The legislation also opens up 401(k)s to millions of workers who are part-time employees, most of whom are left out today. The SECURE Act also allows small businesses to band together and form “Multiple Employer Plans” that will reduce administrative burdens, costs and risks.
While the SECURE Act is not a panacea for our retirement savings crisis, it is a big step in the right direction. Let’s take a look at the key provisions and changes in the new SECURE Act which went into law on January 1 this year.
Elimination of the “Stretch IRA” – Stretch IRA is a term that was used to describe a technique in which a beneficiary would extend distributions from an inherited IRA over his or her lifetime if so desired. This enabled young beneficiaries to extend the payout period from an inherited IRA over decades, spreading out the payment of income taxes over a long period of time.
The SECURE Act effectively eliminated Stretch IRAs as an estate planning tool. For deaths occurring after December 31, 2019, funds from inherited IRAs must now be fully withdrawn by beneficiaries within 10 years of the account owner’s death.
Most critics of the SECURE Act point to the elimination of the Stretch IRA as a “money grab” by the government, and it’s true it will save Uncle Sam tens of billions over many years. It’s also true that it will accelerate income taxes on those who would have otherwise kept the money in the retirement account for more than 10 years – a relatively small number of people. Fortunately, it does not apply to retirement accounts you leave to your surviving spouse, minor children, the chronically disabled and certain others.
Raising of the age for RMDs – Distributions must begin from traditional IRAs when savers reach a certain age. The SECURE Act raised the age for these required minimum distributions (or RMDs) from 70½ to 72. This will enable individuals between these ages to keep money in their IRAs longer and put off paying income taxes on withdrawals if they don’t need the funds yet. However, the new rule does not apply to those already older than 70½ or turned 70½ in 2019. Those individuals must continue or begin taking RMDs under the old rule.
Expanded plan eligibility for part-time workers – Also starting next year, part-timers who have worked more than 500 hours a year for three consecutive years must be allowed to participate in their employer’s 401(k). Part-timers who worked 1,000 hours or more during the past year also must be granted access to the plan.
New employer protections for offering annuities – Due to liability concerns, many employers have been hesitant to offer annuity contracts as an investment option for plan participants. The SECURE Act provides a safe harbor for plan sponsors that will protect them from liability when selecting an insurer. As a result, more businesses may start offering these popular options in their investment menus.
Lower barriers for offering multiple employer plan, or MEPs – Many small businesses that would like to offer a retirement plan are discouraged by excessive compliance burdens and high administrative costs. One simpler and more cost-effective solution is a multiple employer plan in which small firms join together to offer a single plan, sharing a plan administrator and lowering costs and administrative duties.
However, in order to form a MEP, the participating businesses must have a common connection or similarity such as being in the same industry, for example. Yet starting next year, these rules will be relaxed further so that it’s easier for unrelated businesses to form MEPs. This should increase access to a retirement plan for employees who work at small firms.
While the highlights noted above do not cover all the new provisions and changes, the SECURE Act will almost certainly have wide-ranging effects on the retirement saving and planning landscape in the United States – for the better in most cases. I hope this helps.
[…] I should note that figures such as those quoted above count only people who have a 401(k). Many lower-income workers, particularly at smaller businesses, could not save in a 401(k) even if they wanted to because their companies don’t offer such plans. Fortunately, legislation passed late last year aims to make it easier for smaller employers to band together and offer retirement plans – the so-called SECURE ACT. I wrote about it in detail on January 30. […]