The legislation, signed into law on Dec. 20, was designed to help Americans boost their retirement savings. Hardly anyone is socking away enough money for the golden years, and more than a quarter of U.S. adults have nothing saved at all, according to the Federal Reserve.
Most parts of Secure took effect at the start of the new year. Will you be affected for better or for worse? That’s anyone’s guess right now, but here are five things we do know.
1. You'll be able to leave money in a retirement account longer
Retirees will feel free to let their savings grow for an extra year and a half.
Required minimum distributions (RMDs) from retirement plans — the mandatory withdrawals that allow the IRS to start collecting taxes on your savings — currently kick in at age 70 ½. That's being bumped up to age 72.
A financial planner can help you find the best use of the cash you withdraw. CFP professionals are conveniently available online now, through services such as Facet Wealth.
2. You won't have a time limit on IRA contributions
More and more Americans are working into their 70s. In 1998, 17.7% of Americans between ages 65 and 74 were in the workforce. That's expected to grow to 32.5% — almost double — by 2028, says the U.S. Bureau of Labor Statistics.
As you stay in the workforce, you should be able to keep putting money into a retirement plan, says Republican Sen. Rob Portman of Ohio.
"We have to ensure that there is longer lifetime savings as people are living longer and healthier lives," Portman told his colleagues during a speech on the Senate floor.
So, the new law eliminates the maximum age, 70 ½, for contributing to a traditional IRA — provided that you have earned income. Roth IRA and 401(k) plans have never had similar age limits.
3. Inherited IRAs will be taxed sooner
Starting in 2020, "stretch" IRAs — which have allowed anyone inheriting a retirement account to potentially stretch out withdrawals and tax payments for decades — will cease to exist. Beneficiaries will have to withdraw the funds and pony up for the taxes within 10 years.
The law doesn’t apply to spouses, the disabled or people with chronic illnesses, nor will it affect people who inherited an IRA prior to 2020.
For anyone who planned to pass down a traditional or Roth IRA to someone other than a spouse, estate planning just got more complicated.
4. If you have a 401(k), you'll have new options
When it comes to saving for retirement, having too many choices is a good thing.
Employers have been nervous about offering annuities in their 401(k)s, for fear they'd get sued if the insurer went belly-up. The new law offers protection against those sorts of lawsuits, so theoretically it will be easier for plan sponsors to offer annuities and other options that promise guaranteed income in retirement.
The Secure Act also requires 401(k) administrators to provide annual disclosure statements that will show how much you might earn each month if you bought an annuity with part of your 401(k) balance.
However, the statements won't start appearing until the IRS does its work, and that’s too convoluted to go into here.
5. You may get access to a retirement plan for the first time
Around 31% of U.S. workers don’t have the chance to sign up for a work-sponsored retirement plan, typically because they're part-timers or employees of small businesses. The Secure Act aims to change that.
Employers will have to open their retirement plans to part-timer workers who put in 1,000 hours in a single year or 500 hours per year for three consecutive years.
The law also provides financial incentives to small businesses that offer plans. There’s a tax credit, for example, to offset startup costs, and yet another credit for plans that offer automatic enrollment.
What people are saying about Secure
The Secure Act was three years in the making and had bipartisan support, but reactions to it have ranged from enthusiastic to scathing.
Some financial experts and consumer advocates worry that employees will be misled into buying pricey annuities they may not need. And Ed Slott, a well-regarded retirement expert, tells Barron's that wiping out the stretch IRA makes the individual retirement account a "lousy estate-planning vehicle."
There are even those who shrug and say, "Meh," insisting that Secure won’t have a dramatic impact one way or another. Those in that camp call on lawmakers to tackle bigger issues like the ailing Social Security system and the federal corporation that guarantees pensions.
One thing's for sure: Any action taken to avert financial crises for aging Americans is a step in the right direction.