The Secure Act — What You Need to Know

What is the SECURE Act?

The SECURE Act of 2019, was signed into law by the president on December 20, 2019. It is an acronym for the Setting Every Community Up for Retirement Enhancement Act. The act is a far-reaching law which will affect the way Americans can save for retirement when using tax-deferred accounts. It also limits the options for inherited 401(k)s and IRAs, known as “stretch IRAs,” and changes the required minimum distribution rules (RMDs) that were in effect prior to the passage of the Act.

Why the SECURE Act?

Most Americans are not keeping enough money for their retirement. According to MarketWatch, the average 401(k) balance as of September 2018 was a mere $106,500. Unfortunately, those who are retired have become more and more dependent on Social Security.  Currently 50% of married couples depend on Social Security for half their income, while 70% of those who are unmarried depend on Social Security for half their income. And unfortunately, over 20% of married retirees and over 45% of single retirees are dependent on Social Security for 90% or more of their income.

This is one reason the Act was enacted; to help Americans save more money by:

  • Making it easier for employers to set up a 401(k) and SIMPLE IRA plans
  • Making regulations more friendly for employers
  • Providing employers with a tax credit for automatically enrolling their employees in a 401(k) or SIMPLE IRA

Furthermore, the SECURE Act aims to help Americans save more money for their retirement by: 

  • Making many part-time employees eligible for enrollment in their employers 401(k) plan 
  • Increasing the cap of employees’ wages, which employers can use to set up retirement plans, from 10% to 15%
  • Extending the time allotted to make contributions to a 401(k) or IRA past age 70 ½, as long as you’re still working 
  • Limiting liability for employers sponsoring a 401(k) plan when they add annuities for lifetime income options within the plan

The flexibility to add annuities to 401(k) plans is a notable feature of the new Act. Formerly, the regulations forced 401(k) plan sponsors to use the lowest-cost plan and accept certain liabilities for these contracts to meet specific guarantees.

The Act removes these restrictions and allows the insurance company issuing the annuity to assume that liability. This could be a good thing as long as 401(k) participants understand the differences between types of annuities, namely those that provide a legally binding contract of a guaranteed future income and those that don’t provide any legally binding guarantee of future income.

Other Features in the SECURE Act of 2019:

  • A $5,000 penalty free withdraw at the birth or adoption of a child, 
  • Allows funds from tax-deferred 529 accounts to repay student loans up to $10,000, and
  • Extends Required Minimum Distributions (RMDs) from age 70 ½ to 72.

A Benefit for the U.S. Government:

While the Act was passed because it was supposed to help Americans save more money for retirement, it also was passed because it will increase the amount of money the IRS can collect on inherited retirement accounts.

Previously, those who inherited a 401(k) or an IRA and were not married to the original owner could stretch out the taxes owed on that inherited IRA or 401(k) over their entire lifetime. This will no longer be permitted.

Now, an IRA or a 401(k), inherited by a person not married to the owner will generally be forced to take required distributions from that IRA or 401(k), in such a manner that all funds from that inherited account will be distributed within 10 years. With this accelerated distribution, the IRS will be able to collect more taxes from the new owner due to their higher income level. Congress expects to raise $15.7 billion by including this feature.

There are exemptions in the SECURE Act which would prevent accelerated distributions from being applied if the heir is:

  • Less than 10 years younger than the original owner
  • A minor child
  • A disabled or chronically ill beneficiary
  • A surviving spouse.

Encouragement of Multiple Employer Plans:

Nearly half of American workers that are employed by small businesses don’t have access to retirement plans through their employer. The Act attempts to improve this by creating new Multiple Employer Plans (MEPs). 

In the past, the IRS could impose severe tax liabilities on MEPs if merely one employer failed to satisfy the tax qualification rules. The SECURE Act eliminates this risk for small business owners and allows completely unrelated employers to participate in MEPs, hopefully making it easier and more cost effective for employers to group together to provide retirement plans for their employees.

Clarity for Retirement Planning

The Act requires “lifetime income disclosure statements” be provided so that 401(k) and SIMPLE IRA owners can see how much money would theoretically be paid each month in your retirement if the total account balance was used to purchase an annuity. This may or may not be helpful as many types of annuities focus on speculative annuity projections versus guaranteed annuity payments for life. 

Will the Act Help People Save More Money for Retirement?

It remains to be seen if the bill will actually help people save more for their retirement or if it will merely become a false security for people to believe that the government will take care of them, instead of taking more responsibility for their own future needs. In order to help people save more money, the 2019 act must work better than another retirement security act from 1974.

It was the Employee Retirement Income Security Act of 1974, also known as ERISA, that introduced the 401(k) plan. Preceding the 1974 Act, employer funded pensions and benefit plans were the major way that employers saved for their employees’ retirements. Furthermore, in 1974, personal savings rates ranged between 11.6% in January to 11.1% by the end of December, not once dipping into single digits.

Since ERISA was enacted, except for a 3 month period where the savings rate peaked at 14.6% in May of 1976, Americans have never saved at those high rates again. In fact, the last time America has saved in double digits was May of 1980. Since then savings rates have been in single digits or even negative. 

As of January 2019, MarketWatch reports that the average 401(k) balance in America was $106,500. Furthermore, the age group most at risk for not having enough money saved for retirement (ages 50-69) have a median balance in their 401(k) of only $63,000.  This means they too will retire dependent on Social Security for over 50% of their income.

Looking to the Future

Time tells all, but based on historical data, when Congress attempts to improve on something, they usually pave the way to make things more complicated and difficult for those they were attempting to help. 

Hopefully, the SECURE Act will do more for Americans than the ERISA Act of 1974 did because Americans really do need to keep more money than they are currently keeping if they want to retire and live the lifestyle they have become accustomed to living.

Should You Save More In Your 401(k) or IRA?

In light of the SECURE Act, it’s a good time to reconsider your saving strategy for 2020. How much should you save in your 401(k), IRA and other tax-deferred accounts? How much should you keep in after-tax accounts? 

The SECURE Act promotes an assumption that it will be a good thing to accumulate more money in your tax-deferred accounts. But realize that Fortune.com seriously questions the wisdom of saving too much in accounts that will limit your access and could leave you under-budgeted for other needs.

Traditionally, many Americans have used participating whole life insurance as a savings tool where they can get a high level of guarantees, liquidity and even growth on their premium dollars in addition to the insurance protection. Many people will find 2020 the right year to adopt participating whole life insurance as an important part of their saving strategy because it solves the need for current liquidity.

Another benefit of life insurance: If you don’t need all the cash value in retirement, you can leave a legacy that is completely income-tax free.

But if you accumulate more money in tax-deferred accounts, you could end up creating a bigger tax liability for your heirs under the SECURE Act, if you don’t spend all your money in retirement.

At Life Benefits we help people who want to keep more of their money and don’t want to save too much in tax-deferred accounts or other accounts where access to money will be very limited.

There is no one-size-fits-all strategy when it comes to integrating life insurance in your strategy. This is where Life Benefits can help you get a plan to keep more of the money you make and have financial peace of mind.