The Impact of the SECURE Act On Your Retirement Savings

By Mike Flower on October 23, 2019

With the decline of traditional pensions, most Americans are shouldering the responsibility of saving for their own retirement.  In today’s do-it-yourself retirement savings, most people largely rely on 401(k) plans and IRAs.  Unfortunately, some Americans have no retirement savings at all.

Help may be on the way.  In May, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act (Secure Act), which is designed to make retirement savings easier and more available for Americans. To get you ready in case this bill becomes law, here are some of the ways the SECURE Act could affect your retirement savings.

• The chance to contribute to traditional IRAs for as long as desired.
• The minimum distribution age for retirement accounts changes from 70 1/2 to 72 years old.
• Penalty-free withdrawals to be allowed for special circumstances.
• Annuity information and options would be expanded.
• More opportunities to participate in a 401(k) plan.
• A requirement to withdraw from inherited retirement accounts within 10 years.

No Age Restriction

Americans are working and living longer, so why not let them contribute to an IRA longer? Currently, Americans with earned income can contribute to a traditional IRA account up to the age of 70 1/2. Under the SECURE Act, the age limit would be removed entirely.  If the SECURE Act is enacted, you could continue to put away money in a traditional IRA into your 70s and beyond, for as long as you are working.

Required Minimum Distributions (RMDs) Starting at 72

Under current laws, retirement account owners must begin to withdraw funds when they turn age 70 1/2. If the SECURE Act is passed by the U.S. Senate, the required minimum distribution age for retirement accounts would be increased from 70 1/2 to 72. This would give workers an additional 18 months to take advantage of the tax benefits provided with retirement accounts before beginning withdrawals.

Penalty Free Withdrawals for Special Circumstances

Under the SECURE Act, new parents would be able to withdraw funds without paying the usual 10% early-withdrawal penalty.  These include qualified birth and adoption expenses.  The limit on the distribution would be $5,000 and would need to be claimed within one year of birth or adoption.  If married, each spouse could withdraw $5,000 from his or her own account, penalty-free. Please remember, you would still owe income tax on the distribution, unless you repay the funds.  Recontributed amounts would be considered as a rollover and not included in taxable income. Currently, penalty free withdrawals can be made for certain circumstances such as large medical bills, disability, first home purchase, and higher education expenses.

Annuity Information and Options Would be Expanded

Knowing how much you have in your 401(k) account is one thing but knowing how long it’ll last is another.  Currently, 401(k) statements provide an account balance, but don’t give you an idea of what your monthly income would look like once you stop working.  The SECURE Act would require plan administrators to provide annual “lifetime income disclosure statements” to plan participants.  For illustrative purposes only, these statements give you an idea of how much money you could get each month if your total 401(k) account balance were used to purchase an annuity.

Also, if the SECURE Act is enacted, it would make it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options.  These annuities would be portable as well.  For example, if you left your job, you would be able to roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA.

More 401(k) Opportunities

The legislation would allow for multi-employer 401(k) plans, meaning it would be less costly for small employers to start and maintain retirement plans for workers. It would also permit part-time workers to participate in 401(k) plans.

Generally speaking, employees who haven’t worked at least 1,000 hours during the year typically are not allowed to participate in their employer’s 401(k) plan.  If the SECURE Act is enacted, it would guarantee 401(k) eligibility to employees who have worked at least 500 hours per year for three consecutive years and 21 by the end of the period.

Inherited Accounts Will Need to be Distributed

Now for some bad news – The SECURE Act would eliminate the current rules that allow non-spouse IRA beneficiaries to stretch RMDs from an inherited account over their own lifetime.  This potentially allow the funds to grow tax-free for decades.  Instead, all funds from an inherited IRA would have to be distributed within 10 years of the IRA owner’s death to the non-spouse beneficiaries.

Exceptions to this rule to have distributions over the life or life expectancy of a non-spouse are allowed in special circumstances.  These are if the beneficiary is a minor, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner.  For minors, this rule applies until the child reaches the age of majority.  At that point, the 10-year rule would kick in.

In the case of a spousal inherited IRA, RMDs are delayed until the end of the year that the deceased IRA owner would have reached 72.  If the surviving spouse transfers the assets into an IRA under their name, the required minimum distributions would start when the surviving spouse turns 72.