What is underway as one of the most significant changes to retirement savings plans in years, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) was passed in May 2019 by the U.S. House of Representatives. The Act is awaiting approval by the U.S. Senate later this month (August 2019). If passed, the SECURE Act will:
- Change the way company retirement plans are administered
- Offer more investment options
- Allow plan participants access to financial advisors
- Change the retirement plan’s distribution ages
- Mandate employee retirement plan participation is offered to both full-time and part-time employees.
If the SECURE Act is passed in the U.S. Senate and becomes law, it will be the greatest change to retirement savings plans since Congress allowed for automatic enrollment of employees and the addition of Target Date funds to retirement plans in 2006.
The SECURE Act aims to help Americans save more for retirement with advisory services and financial education now being included as part of all company retirement plans. Small businesses previously left out of offering retirement plans due to the high cost of plan administration, will now be grouped with other small businesses to allow for cost-sharing.
Most U.S. employer retirement plans administer by third-party providers, not the investment company or the financial advisor, and are a direct cost to the employer. Employer’s pay for each employee that participates in the plan, yearly upfront costs for having a retirement plan, and the employer contribution match.
What are the main features of the SECURE Act?
- Increasing the RMD (Required Minimum Distribution) age from age 70 ½ to age 72.
- Section 529 education savings account owners will be allowed to use retirement accounts to cover the costs of homeschooling, qualified student loan repayments of up to $10,000 (siblings included), private schools, and apprenticeships for the beneficiary of the account. The catch is a 529 plan must be in place for the retirement account to be used for education with no tax or early withdraw penalty.
- New 10-Year Rule to replace 5-Year Rule. Retirement accounts must distribute all benefits within ten years after a retirement plan participant dies or an IRA owner dies, except when the beneficiary is a spouse, disabled or chronically ill, a child who hasn’t reached the age of majority, or a beneficiary not more than ten years younger than the deceased owner. Currently, all benefits from an inherited retirement account or IRA must be depleted by the end of the fifth year of the owner’s death.
- Employees can make contributions after age 70 ½ to their retirement accounts; currently, workers over age 70 ½ are unable to contribute to their retirement savings accounts. The Act would help workers who plan to continue to work into their 70’s save additional money for retirement.
- 401(k) plans will offer annuities as an investment choice to help workers help guarantee a portion of their retirement savings from market risk. Annuities are backed by the claims-paying ability of the insurance company and are an insurance product.
- Parents would be allowed to withdraw $5000 penalty-free to pay for expenses related to the birth of a child or a new child through adoption.
- Permanent part-time workers (working 500 or more hours per year for at least three consecutive years) would be allowed to participate in their company’s retirement plan.
The goal of the SECURE Act is to help American’s save more for retirement, which is also my goal for my clients. If you have questions on retirement savings plans, other investments outside of your employer’s plan or education savings plans, feel free to reach out to our office to schedule a meeting anytime.