Key elements of the SECURE Act

December 19, 2019 by Kelton Corcoran

about the author:

Kelton Corcoran

Senior content marketing specialist

Kelton Corcoran is a senior content marketing specialist at Advicent, the financial planning technology provider of choice for nearly 100,000 financial professionals.

Originally published on Thursday, December 19, 2019 and updated to reflect bill signing on Friday, December 20, 2019.

On Friday, December 20, 2019, President Trump signed a year-end spending bill into law, which includes a piece of legislation that will have a tangible impact on how Americans save for retirement: The Setting Every Community Up for Retirement Enhancement (SECURE) Act.

The SECURE Act was first introduced back in March 2019 and successfully passed through the House in late May, with a lopsided 417-3 vote. Following that vote, momentum on the act slowed, even though “only a few senators opposed the bill” according to Jamie Hopkins on InvestmentNews. The goal was to get 100 Senate votes for the act secured to avoid using extensive floor time on what was seen as a fairly noncontroversial bill. During that delay, however, articles came out in the Wall Street Journal criticizing the bill – further extending the delay. After being signed-in on December 20, the SECURE Act is now effective starting on January 1, 2020.

Highlights of the SECURE Act

The SECURE Act brings important changes to the way Americans save for retirement and is said to be the biggest piece of retirement legislation in the past decade. Let’s take a look at some of the key elements that are included.

Extends Required Minimum Distribution (RMD) age from 70.5 to 72

Previously, investors were required to begin taking a minimum distribution amount from their IRA, 401(k), or other similar accounts by the time they reached the age of 70.5. The penalty for an investor who does not take their RMD is severe as shortfalls are subject to a 50 percent penalty. Under previous law, say an investor had an IRA worth $400,000 and is 71 years old. If they were to miss taking their RMD, a total of approximately $15,094.34, they would have incurred a penalty of $7,547.17 for doing so.

Under the SECURE Act, investors can wait on taking RMDs until the age of 72, allowing for more time to have their retirement accounts grow. This extended period is important as we continue to see an increase in both life expectancy and retirement age. Additionally, this helps clear up possible confusion of dealing with a half-birthday.

Allows for IRA contributions past age 70.5

Along with being able to keep retirement accounts growing for an additional one and a half years, investors are able to continue making tax-favorable contributions to their IRAs past the age of 70.5 under the SECURE Act.

This, along with the extended RMD period, is extremely beneficial to individuals who find themselves working past the age of 70.5. Now, these individuals will be able to maximize the benefit of the income they earn between the ages of 70.5 and 72.

Elimination of stretch IRA

Identified as one of the biggest setbacks of the SECURE Act is the elimination of the stretch IRA, which is the practice of stretching inherited retirement account distributions over an entire lifetime. While spouses continue to have this ability, non-spouse beneficiaries need to take distributions to deplete the inherited retirement account within 10 years. This change is sure to alter the way estate planning is handled moving forward.

It is important to note that this change is designed to close this loophole for the future and beneficiaries who inherited an IRA before the end of 2019 are still be able to take stretch IRA distributions over their lifetime.

Multiple Employer Plan provision

The SECURE Act also aims to open the availability of retirement accounts to more Americans by allowing unrelated small businesses to pool together and offer their employees retirement plans. This change is intended to reduce the burden that small businesses may have when considering the implementation of a retirement plan for their employees, which can include a list of additional administrative and fiduciary responsibilities.

Further, startups are now more incentivized to implement a retirement savings plan, with tax credits for doing so increasing from $500 to $5,000 and being offered a $500 credit for plans that are set up with automatic enrollment.

Increasing employee access to retirement savings plans is crucial as work-based plans are the primary way that a majority of Americans save for retirement today. According to research from Pew Charitable Trusts, fewer than 15 percent of U.S. households save for retirement outside of work-sponsored plans. This increased availability for small businesses is crucial as research from the Census Bureau in 2018 found that just 45 percent of workers at companies with 1 to 49 employees had access to a work-sponsored retirement plan, compared with 76 percent at companies of 50 to 99 employees, and 90 percent for companies with more than 100 workers.

For continued updates on the SECURE Act, how it will impact financial planning, and other industry trends, follow Advicent on Twitter and LinkedIn.

Sign up for the
Advicent newsletter