What is the Secure Act and How Will it Affect Your Retirement Savings?

Editor’s note: The Secure Act makes changes to aid retirement savers. Learn about Secure Act tax changes and how it could impact your tax outcome here…

What is the Secure Act?

What is the Secure Act? The Secure Act was passed in part to motivate employers who haven’t previously offered retirement plans to employers to begin offering them. In addition, it will promote retirement savings for employees.

Secure Act of 2019: 2020 Impacts

The Setting Every Community Up for Retirement Enhancement Act, or the Secure Act, was enacted in December 2019, as part of an end-of-year appropriations act and supplemental tax measure. The Secure Act retirement bill has a significant impact on access to tax-advantaged retirement accounts and preventing individuals from outliving their retirement assets.

Why Pass the Secure Act?

Point blank: retirement savings is important, yet the majority of Americans don’t have a substantial nest egg tucked away. According to the U.S. Bureau of Labor Statistics, only 51% of private industry workers had access to only a defined contribution workplace retirement plan such as a 401(k) plan. And 22% have less than $5,000 in savings for retirement, according to Northwestern Mutual’s 2019 Planning & Progress Study.

Who Benefits from the Secure Act?

Both businesses and individuals benefit from the Secure Act in a number of ways. Read on and we’ll outline the essential changes that affect business owners and individuals alike.

Secure Act Tax Changes

The Secure Act changes the rules of a number of tax-advantaged retirement accounts. Here are a few Secure Act tax changes and its effect on retirement savers:

Business Changes From The Secure Act

• A tax credit of up to $500 per year is available to qualifying employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
• Businesses can more effortlessly encourage 401(k) contributions by increasing the cap on the default contribution rate when automatically enrolling employees in “safe harbor” retirement plans from 10% to 15% of wages.
• Businesses must allow certain part-time employees with three consecutive years of service, serving 500 hours per year to enroll in a qualified retirement plans like 401(k)s, beginning in 2021.
• When annuities are included in retirement plans, there are more options available to rollover the investment from the employer-sponsored retirement plan if the annuity option is no longer permitted or available.
• There is no age limit on making traditional IRA contributions. Prior to the Act, you couldn’t contribute to a traditional IRA after reaching age 70.5 even if you still worked. Now, you can contribute if you meet other eligibility requirements, no matter your age.

Individual Changes from the Secure Act

• The age of retirement plan participants to start taking required minimum distributions (RMDs) has been pushed back from 70½ to 72.
• There is no age limit on making traditional IRA contributions. Prior to the Act, you couldn’t contribute to a traditional IRA after reaching age 70.5 even if you still worked. Now, you can contribute if you meet other eligibility requirements, no matter your age.
• Stretch IRAs can no longer be used. This was a provision allowed non-spouses who inherited retirement accounts to stretch disbursements over the life expectancy of the beneficiary. After the Secure Act passed, people are now required to fully distribute the inherited IRA within 10 years of the death of the original account holder. (This only applies to heirs of account holders who pass away beginning in 2020.)
• Students repaying qualified student loans can now use 529 accounts (up to $10,000 annually, tax-free) to make student loan payments. Previously, qualifying individuals could only use 529 accounts for qualifying education expenses.
• People can now withdraw $5,000 from a 401(k) or IRA to defray the costs of having or adopting a child without paying a penalty for early distribution.

A Recap: How Does the Secure Act Benefit You?

So, whether you are an individual or business, the Secure Act of 2019 could have multiple impacts on your financial and tax outcomes. All-round the act was created to make retirement savings more accessible.

If you’re a business owner, the act benefits you and your company by giving you ways to take valuable credits and make your retirement plans more attractive for your employees. For individuals, the new rules provide you additional flexibility and accessibility in investing for retirement.

Help with Retirement Savings Accounts and Taxes

Retirement savings and taxes can get a bit complicated. If you need help, we’re here for you. Whether you’re navigating Secure Act tax impacts or otherwise, find out how you can work with one of our tax pros to get your tax questions answered!