SECURE Act: What It Means, How It Works, Rationale

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What Is the Setting Every Community Up for Retirement Enhancement (SECURE) Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a 2019 law designed to help more Americans save for retirement. It was part of a more comprehensive spending and tax extension bill that was signed into law by former President Donald Trump on Dec. 20, 2019.

The SECURE Act 2.0, passed in 2022, added many additional provisions to the original, with the same goal of expanding access to retirement plans and encouraging their adoption.

Key Takeaways

• The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was designed to encourage more employers to offer retirement plans and incentivize more employees to participate in them.
• SECURE Act 2.0, passed in 2022, added more provisions on the same theme.
• Both bills are attempts to address the retirement savings shortfall that many Americans face as they mature.

Understanding the SECURE Act

The SECURE Act was designed to improve the retirement prospects of many American workers by making it easier for employers to offer tax-advantaged savings plans and easier for employees to participate in them.

It does the following:

• Makes it easier for small businesses to offer their employees 401(k) plans and adds tax credits and protections on collective Multiple Employer Plans.
• Allows retirement benefits to be extended to long-term, part-time employees.
• Removes maximum age limits on retirement contributions, formerly capped at age 70½.
• Raises the required minimum distribution (RMD) age to 72 from 70½. (The age has been raised to 73 as of Jan. 1, 2023.)
• Allows penalty-free withdrawals of up to $5,000 from retirement plans for the birth or adoption of a child.
• Relaxes rules on employers offering annuities through sponsored retirement plans.
• Allows penalty-free withdrawals of up to $10,000 from 529 education savings plans for the repayment of certain student loans.
• Revises components of the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of students, some Native Americans, and deceased veterans.
• Removed the stretch IRA estate-planning strategy that permitted non-spouse beneficiaries of IRAs to spread disbursements from the inherited money over their lifetimes. The new limit is within 10 years of the death of the original account holder. This change was intended to raise an estimated $15.7 billion to pay for the other changes.

Rationale for the SECURE Act

The bill was meant to address Americans' difficulty in saving enough money for retirement. A 2018 study by Northwestern Mutual found that one in five Americans have no retirement savings at all, while one in three of those closest to retirement age has less than $25,000 saved.

Given longer life expectancies than previous generations, coupled with the rate of inflation, a minimum balance of $1 million in retirement accounts is recommended for people who plan to stop working.

$1 million

The recommended minimum amount of retirement savings needed to live comfortably.

Part of the problem has been attributed to the shift away from defined-benefit plans, or pensions, to defined-contribution plans such as 401(k) plans. Employees are now expected to save on their own, sometimes with an employer contribution and sometimes not.

Contributions to defined-contribution plans are most often deducted from an employee's paycheck, and the balance is allowed to grow tax-free until withdrawal, usually during retirement.

Once they reach a certain age, savers are required to withdraw a set amount from their retirement savings vehicles each year if they have a traditional plan, which defers income taxes until the money is withdrawn. This withdrawal requirement is called a required minimum distribution (RMD). The SECURE Act raised this age to 72 but it was later raised again to 73 as of Jan. 1, 2023.

Delaying the age for RMDs delays the tax burden of withdrawals and helps preserve savings that may need to last the retiree for decades.

Does the SECURE Act Affect My IRA?

Yes, and in a good way. There is now no age cap associated with investing in an IRA and taking the tax advantages that come with it. As long as you have earned income, you can contribute to an IRA. This is an acknowledgment that many people can't or won't retire at age 70 1/2, which was formerly the cut-off.

Does the SECURE Act Affect My 401(k)?

Actually, it may get you access to a 401(k). The SECURE Act requires employers who offer a 401(k) plan to make it available to long-term part-time employees. That should be good news for many of the gig economy workers who enjoy few or no employee benefits.

How Does the SECURE Act Affect Required Minimum Distributions (RMDs)?

The age for taking RMDs is 73 as of Jan. 1, 2023. That's actually a change from the 2019 SECURE Act, which raised the age to 72.

The Bottom Line

The SECURE Act builds on previous legislation that was proposed but failed to gain traction in recent years, namely the Family Savings Act and multiple iterations of the Retirement Enhancement and Savings Act (RESA). A version of RESA was under consideration in the Senate after its introduction on April 1, 2019. The bill died after not receiving a vote, but the SECURE Act passed and became law.

1. United States Congress. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019."
2. U.S. Senate. "SECURE 2.0 Act of 2022."
3. Northwestern Mutual. "1 In 3 Americans Have Less Than $5,000 In Retirement Savings."
4. Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs."

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A 457 plan is a tax-advantaged retirement savings account available to many employees of governments and nonprofit organizations.

Income in respect of a decedent (IRD) is money owed to a person before they passed away (e.g., wages). The person or entity that inherits the income pays the taxes.

A simplified employee pension (SEP) is a retirement plan that an employer or a self-employed individual can establish.

An inherited IRA is an account that must be opened by the beneficiary of a deceased person's IRA. The tax rules are quite complicated.

A nonperson entity that inherits a retirement account is classified as a "not designated beneficiary" under the SECURE Act for the purposes of required withdrawals.

A required minimum distribution is a specific amount of money you must withdraw from a tax-deferred retirement account each year, beginning at age 73.

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