The Secure Act: What You Need to Know

by Murray Coleman - Friday, 20 December, 2019

The retirement picture in America isn't pretty. Just look at the data, which paints a rather graphic landscape of too few people saving and investing for their golden years. 

  • The median balance in 401(k) plans held in accounts administered by Fidelity was $24,500, estimates the nation's largest defined contribution plan record-keeper.1 

  • Schwab, another major custodian in the field, reports that a majority of its brokerage customers who are saving through a workplace plan contribute less than 10% of their annual salary to a 401(k) plan.2

  • Just 20.1% of American families have liquid savings of more than three months of their family income.3

It's not surprising, then, Congress has passed the biggest set of policy reforms in a decade. It's called the Secure Act, shorthand for the official title of "Setting Every Community Up for Retirement Enhancement Act." 

In a nutshell, the act expands many of the most popular features of defined contribution retirement plan platforms, commonly known as 401(k) plans. By creating more flexibility for employers, especially smaller companies, millions more full- and part-time workers are expected to take advantage of workplace sponsored retirement plans. Certain provisions will impact investors in Individual Retirement Accounts (IRAs) and related personal savings accounts, as well. 

One of the broadest changes offered by the Secure Act is allowing employers to automatically enroll workers at 6% of their salaries, up from the previous 3% level. Also, plan sponsors can utilize a so-called safe harbor option included in the act to increase employee contributions up to a maximum of 15% of that person's annual pay. 

Besides raising auto-enrollment levels, the act provides a tax credit of up to $500 a year to employers who establish a 401(k) or Simple IRA plan that uses automatic enrollment procedures. 

It's probably also worth noting that companies are allowed under the Secure Act to register part-time employees who work 1,000 hours in a year or have three straight years with 500 hours of service, points out John Dahlin, a certified public accountant (CPA) and head of IFA Taxes. 

Other significant changes to current defined benefit plan and personal savings account provisions he highlights in the act impact:

Required Minimum Distributions (RMDs) 

Before, when you reached age 70.5, most traditional retirement account savers had to start taking so-called required minimum distributions (RMDs). That's still true, but the Secure Act raises that age to 72. "Beginning in 2020, the age requirement for all RMDs will be for people who are 72 years or older," says Dahlin of IFA Taxes, which is a division of Index Fund Advisors. It's important to note, he adds, that "anyone who took an RMD in 2019 will still be subject to the previous age limit."

Deductible IRA Contribution Age Limits

In the past, savers who were 70.5 years or older with earned income could only contribute to a Roth IRA. Going forward, savers of any age can contribute to either a traditional or Roth IRA. "Now, some taxpayers who couldn't deduct from their taxes IRA contributions will be able to take advantage of this new law," Dahlin says. 

Inherited IRAs 

The legislation seeks to close a loophole in how Individual Retirement Accounts have been used in the past. Namely, the act eliminates what's known as the stretch IRA. This provision allowed non-spouses inheriting retirement accounts to "stretch out" disbursements over their lifetimes. Now, those IRA savers are being required to take a full payout from their inherited IRAs within 10 years of the death of the original account holder. According to Dahlin, such a provision only applies to heirs of account holders who die starting in 2020.

529 Savings Accounts

Popular 529 savings plans allow parents and grandparents to stash money in a designated account that allows savings devoted to educational-related expenses to grow in a tax-friendly fashion. The Secure Act will let these tax-advantaged 529 accounts to be used for more than just paying for educational-related costs associated with items such as tuition, books and other qualified expenses. It expands use of 529 savings for repayment of student loans, up to $10,000 a year. 

Annuities

Perhaps one of the more controversial expansions provided in the Secure Act is greater protection for plan sponsors against lawsuits if they use annuities in 401(k) platforms. 

These types of insurance products in the past have raised legal liability concerns on the part of some plan sponsors about annuities being open to criticism for not providing low-cost and competitive investment options for plan participants, according to retirement plan experts. 

"In the past, we just haven't seen a lot of annuities used in retirement plans," says Shareen Balkey, director of retirement services at IFA, which serves as an investment advisor and fiduciary on 60-plus institutional retirement plans. 

That has been because of a number of various reasons, not just related to fiduciary concerns related to low-cost and other competitive investment features, she adds. "Annuities aren't always the easiest types of investments -- they're very complex products and not for the faint of heart," Balkey says. 

The veteran retirement plan executive, who has more than 35 years of experience in financial services,  is critical of a perceived lack of education and information made available by plan fiduciaries to employees about investment options offered in annuities. 

"It's going to take a lot more effort on the part of plan administrators who choose to use annuities in terms of providing a high level of transparency, periodic education and regular communications about these products," Balkey says. 

Whether you're active in a retirement savings plan at work or investing through IRAs and other tax-advantaged accounts, IFA's wealth advisors are available to help answer questions you might have about rule changes and savings opportunities introduced through the Secure Act. Please feel free to contact our advisors at: (888) 643-3133. 

As part of our menu of services, we also offer IFA Taxes. This division of IFA works with individual taxpayers as well as business owners to advise on tax strategies. In addition, IFA Taxes provides account and bookkeeping along with tax preparation services for a range of individuals and companies. You can get in-touch with Dahlin by calling him at: (888) 302-0765. Or, you can email him directly at: john@ifataxes.com

Footnotes:

1.) Arielle O'Shea, "The Average 401(k) Balance by Age," nerdwallet.com, Dec. 12, 2019.

2.) Charles Schwab Corp., "401(k) Participants' Investing Behavior May Leave Them Short," 2019 401(k) Participant Study. 

3.) Employee Benefit Research Institute, ""Emergency Savings: The Reality of Workers' Liquid Savings — Evidence from the Survey of Consumer Finances," Aug. 29, 2019. 


This is intended to be informational in nature and should not be construed as tax advice. As a division of Index Fund Advisors, Inc., IFA Taxes provides a wide array of tax planning, accounting and tax return preparation services for individuals and businesses across the United States. IFA Taxes does not provide auditing or attestation services and therefore is not a licensed CPA firm. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter herein.

Certified Public Accountant (CPA) is a license to provide accounting services to the public awarded by states upon passing their respective course work requirements and the Uniform Certified Public Accounting Examination.