What Is The SECURE Act And 9 Ways It Will Actually Boost Your Retirement

What is the SECURE Act?

SECURE Act is the biggest retirement system change passed by the US Congress in 13 years. Unfortunately, it had to be buried within the government’s spending bill; since nothing gets past the Senate lately.

The Social Security Administration has been communicating for over a decade about The Future Financial Status of the Social Security Program; and it does not look good. It made sense for Congress to transfer most of the retirement responsibility to the individuals. It would be great to have a complete overhaul, but Social Security is a landmine no one wants to touch. This bill tinkers around the edges and does address some issues in our changing economy with respect to part time workers, smaller employers and people continuing to work beyond 70 years of age.

SECURE stands for Setting Every Community Up for Retirement Enhancement. I am sure you must be wondering what is the SECURE Act and how am I impacted? What does SECURE Act mean for my retirement?

There are 9 major parts of the bill which would affect your Financial Freedom Countdown. Let us walk through each in detail.

Small Business Retirement Plans

1. The new SECURE Act increases the tax credit available for 50% of a small business’s retirement plan start-up costs to $5,000. The earlier limit was $500, so this is a 10x increase.
2. In addition to the above credit, a brand new $500 tax credit is added towards the start-up costs for new 401(k) plans that include automatic enrollment. If a small businesses converts it’s existing retirement plan to an auto-enrollment plan; then it can also avail of this credit.
3. The SECURE Act makes it easier for completely unrelated small businesses to join together to provide retirement plans for their employees. The benefit of this provision is for small businesses to leverage economies of scale and have a single plan provider administer it. This should typically results in lower administrative costs. .

The net positives are that the SECURE Act allows small businesses to participate in multi-employer 401(k) plans and share administrative costs.

It also allows them to receive tax credits for implementing automatic enrollment, which places new employees in retirement plans automatically so that they have to opt-out rather than opt-in.

As I’ve mentioned before; to be successful in investing you just need to pick a platform which permits fee-free automatic investment and rebalancing starting with low contribution limits. Tune out the noise and you will be fine. It is natural to worry if I Should I sell my Stocks now based on news headlines. The automatic enrollment feature is a step in the right direction.

401(k) for Part time workers

Part-time workers need to save for retirement too. With the gig economy picking up; a lot of individuals chose to work part-time. Also some industries like retail hires seasonally; so this should benefit those workers as well. The SECURE act lets part-time workers become eligible for retirement benefits, depending on how many hours they’ve worked in a given year.

As per the SECURE Act, employees who have worked at least 500 hours per year for at least three consecutive years are eligible for 401(k) plans

Student Loan repayment

The SECURE Act makes a provision for a withdrawal of up to $10,000 from 529 plans to repay student loans. Given the student debt crushing the millennial generation and the high interest cost associated with various student loans; this could makes sense for some individuals. As always, run your own numbers to figure out if this provision is advantageous for your situation.

Penalty free withdrawal for New parents

New parents, through birth or adoption will be eligible to withdraw $5,000 penalty-free from Retirement plans including workplace 401 (k) to offset the cost of qualified delivery or adoption expenses. This limit is per partner; so ideally you could have access to a combined $10,000. Note that this is only penalty free (aka no 10% early withdrawal penalty). You still need to pay taxes on the money you withdraw; since your contribution into the retirement plan was tax free. I am not a fan of this provision due to the tax hit. But it might make sense in some circumstances; when funds are tight. Addition of a baby to the family involves lots of unpaid time off and scaling down hours. So it could make sense if you do not have a robust Emergency Fund. The best part of this provision is that you could also add the funds withdrawn at a later date.

Graduate students and care providers can save earlier

Graduate and post-doctoral students often receive stipends or similar payments that aren’t treated as compensation under the current law. Therefore it can’t be used to contribute towards a retirement plan. Similar issues apply to payments that foster-care providers receive through state programs; to care for disabled people in the caregiver’s home.

Under the SECURE Act, amounts paid in pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend, etc) are treated as compensation and eligible for purposes of making IRA contributions. This will allow affected students to begin saving for retirement sooner. In a similarly manner, payments to foster-care providers are also considered compensation under the SECURE act for meeting the IRA contribution requirements.

No age restrictions on IRA contributions

Currently, Americans after the age of 70 ½ are not permitted to contribute to a traditional IRA. Starting Jan. 1, 2020 the SECURE Act removes the age restriction for contributing to traditional IRAs. Given that individuals are working longer; and many do not have sufficient money saved for retirement this is a net positive. It should help people shelter more of their earned income from taxes.

RMDs Starting at age 72

At present, you are supposed to take the Required Minimum Distribution (RMD) by age 70 ½. Since people were working longer, this placed an undue tax burden on individuals by forcing them to withdraw when they did not need the money.

The SECURE Act changes the age of initiation for RMDs from 70 ½ to 72. This is a huge benefit not only in terms of tax burden but also allowing additional time for the IRA to grow untouched. The change applies to people who turn 70 ½ after Dec. 31, 2019.

Inclusion of Annuities

The SECURE Act eliminates the employer’s liability when including annuities in retirement plans. It protects employers that follow certain procedures from being sued if they select an insurance company to make annuity payments and that insurer later fails to pay claims.

I can almost hear my smart readers yelling at their screens when reading this line. I know, I said 9 ways the SECURE act will boost your retirement. And my solution is to just be smart and avoid the annuities.

Personally, I believe the intense lobbying by the insurance industry led to the inclusion. And I am sure it  would benefit the insurance industry more than participants.  

I am not a fan of annuities since they are complex, confusing and laden with high fees. It is hard enough to get participants to pick a simple low expense ratio index fund in their retirement plans. Adding annuities would make it worse. 

The only saving grace of this provision is that these annuities are now portable. Which means if you leave your job, you can roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees.

To reiterate, I would be very wary of annuities in retirement plans and treat them as guilty until proven innocent. 

Stretch IRAs eliminated

The stretch IRA allowed beneficiaries who inherited an IRA to stretch payments beyond the course of their lifetime. In the past, one partner could leave their IRA to the surviving partner. When the surviving partner dies, they could leave the balance to their children or grandchildren who could take distribution over their anticipated life expectancies. This minimized the tax obligation of the beneficiary and did not move them into a much higher tax bracket.

Now with the SECURE Act; except in cases of a spouse, minor beneficiary, a chronically ill beneficiary, beneficiaries with special needs, or a beneficiary within 10 years of age of the owner of the IRA; the balance of inherited IRAs must be disbursed within ten years of the death of the second spouse. Anyone who inherited an individual retirement account before the end of this year can still draw down the account over a lifetime.

As a result of the SECURE Act; one can expect much larger distributions during peak earning years. This provision is not a tax increase and was primarily used as a powerful estate planning tool by the wealthy to build multi generational wealth. As per Congress, the IRAs were initially designed to provide retirement income to the account holder only. If the money cannot be spent during the lifetime or the 10 years of the survivor’s lifetime; it means that the individual did not spend appropriately and enjoy life.

I do not agree with this logic but when rules change it is time to shift strategy. Luckily investing in real estate or stocks outside of retirement accounts provides a step-up basis to the heirs. I would fund retirement accounts only to a limit and then fund other accounts. One can buy real estate notes to provide income.

Or open up a non-retirement account with M1Finance instead of over-funding the retirement accounts. Read my M1Finance Review for details on why I prefer it to bigger brokerages like Vanguard, Fidelity or Schwab

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Summary

Given the current state of affairs, the SECURE Act has a lot more positives than negatives. My biggest gripe is with the inclusion of the annuities and elimination of Stretch IRA. My solution is not to select annuities. And to not overfund my retirement accounts by diverting my money to other accounts.

I am most excited with respect to the small business provisions and for part time workers to participate in retirement plans.

Readers, what provisions did you find most favorable and any changes to your retirement strategy based on the SECURE act?