President Trump signed the SECURE Act as part of the government’s spending bill at the end of 2019 and it will inevitably affect most retirement savers, for better or worse. Most of the bill takes effect in 2020. The SECURE Act — SECURE stands for “Setting Every Community Up for Retirement Enhancement” — puts into place numerous provisions intended to strengthen retirement security. Here is a brief summary of the Act’s most important features:
Annuities in 401(k) plans
The SECURE Act allows employers to offer annuities as investment options within 401(k) plans. Currently, employers hold the fiduciary responsibility to ensure these products are appropriate for employees’ portfolios, but under the new rules, the onus falls on insurance companies to offer proper investment choices.
Increasing the required minimum distribution age and contribution age
Previously, account holders with a 401(k) or IRA had to withdraw required minimum distributions (RMD) in the year they turned age 70.5. The SECURE Act increases that age to 72. The bill also eliminates the maximum age for traditional IRA contributions which was previously capped at 70.5 years old.
No more stretch IRAs
Required minimum distributions have also changed for non-spousal account inheritors. Under the current law, beneficiaries who did not inherit their accounts from a husband or wife are in some cases allowed to withdraw required minimum distributions for their life spans. This could be a few years or a few decades.
The SECURE Act requires beneficiaries to withdraw all assets of an inherited account within 10 years. There are no required minimum distributions within those 10 years but the entire balance must be distributed after the 10th year.
Multiple employer plans for small businesses
The Act broadens access to multiple employer plans for small businesses. Previously, companies may have avoided participating in that type of program because of the so-called “one bad apple” rule that stated if one employer did not meet the plan requirements, the plan would fail for all others involved.
Under the SECURE Act, employers no longer have to share “a common characteristic,” such as being in the same industry. Employer-sponsored retirement plans would also be available to long term part time workers with a lower minimum number of hours worked. The SECURE Act drops the threshold for eligibility down to either one full year with 1,000 hours worked or three consecutive years of at least 500 hours worked.
Finally, the SECURE Act encourages employers to automatically enroll workers into their retirement plans by offering tax incentives. Auto-enrollment is a simple but effective means to get people saving more for their futures. Under the SECURE Act, small employers will get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA plan with auto-enrollment, on top of the start-up credit they already receive.