SECURE stands for “Setting Every Community Up for Retirement Enhancement.”
This act was approved by congress in December of 2019.
What was it's goal?
Due to the disappearing pensions and on-going issues with social security, the government seemed to decide they now need to help people gain access to retirement accounts so that less of the elderly outlive their savings, that’s the advertised idea behind this act, at least as it appears on the surface.
However, there are a few things they added to the SECURE Act that seem to also be helping out the government.
Remember, when we’re dealing with these assets that the government creates, there will always be some kind of catch.
The good people of the United States began learning about what exactly the Secure Act held for us in January of 2020.
The first part did seem pretty good.
Small business owners were able to set up “safe harbor” retirement plans that didn’t cost them as much money, since offering pensions is outside of the realm of possibility for most businesses these days due to how expensive they are and how difficult they are to administer. So, that seemed pretty helpful.
The Act made part-time workers eligible for their employer’s retirement plan.
The Secure Act moved back the age for the RMD or Required Minimum Distributions on Traditional IRAs. It used to be 70 ½ and this SECURE act pushed back the age to 72. If you’ll remember from our discussion about IRAs, the RMD is the amount that you absolutely must remove from your Traditional IRA every year in order to start paying taxes on that money. If you don’t remember, you can check out this blog, it breaks down the chat we had about IRA’s so you can use that as a resource if you’re confused on the RMD.
It gives Traditional IRA owners the ability to keep making contributions to their IRA for their entire life with no “end date.”
It allows 401k plans to offer annuities. Here, we have the government admitting that annuities are actually probably pretty helpful, so that’s good. We’ll talk about annuities in our breakdown of some of the investment vehicles next week, so I won’t say anything else about that for right now.
Finally- and we’ve landed on the catch now- the Secure Act made it mandatory for anyone who inherits an IRA, other than the spouse of the deceased, to take enough distributions that they empty the entire account in 10 years. This was a huge change and one that people who had set up their IRA to become an “inheritance vehicle” were very shocked about!
The ramifications on this are huge.
This means that the stretch IRA concept is no longer viable.
For example, if I passed away and my son was 40 years old and left him an IRA, that would pass on to him and he would take the RMD from the account each year, but he’d get to do those calculations as a 40 year old. Then, he’d be able to leave the majority of the money in the account to grow and compound tax-deferred. He could have a stream of income for life from that inheritance account.
Now, this is no longer a possibility.
The IRA has to be completely empty within 10 years and he has to pay the full amount of tax due on any of those distributions.
Now that we’ve covered what the Secure Act did, we can move on to what has become known as the “SECURE Act 2.0”
This is a proposed bill that has bipartisan support in congress. It has already passed the House Ways and Means committee, but there’s not yet a date set for congress to vote on it. There are many who hope it will be passed before the end of this year, so we are keeping a watch on this one.
According to the Think Advisor's Melanie Waddell:
“Secure 2.0 raises the required minimum distribution age from 72 to 75 over 10 years, expands automatic enrollment in retirement plans and enhances 403(b) plans.”
“Secure 2.0 increases the RMD age to 73 starting on Jan. 1, 2022; to 74 starting on Jan. 1, 2029; and 75 starting on Jan. 1, 2032.”
In this proposal, the RMD is moving, again. That’s the first big change. Yet, many retirement experts wonder why they are even keeping the RMD when they continue to move it back further and further, plus they’ve closed off the option of a Stretch IRA. Keeping an RMD with a moving target seems unnecessary and confusing.
Other notable changes are that employers will be required to automatically enroll their employees in 401k’s and the automatically opened plans will be set to automatically take a contribution of at least 3% and that will be set to increase every year by 1% until it gets to 10%, automatically.
Employees would be able to opt-out or change the contribution amounts, but every employer would set this up and it would run it unless the employee changed something.
There are provisions that allow for more annuity options. It’s worth noting that the government has realized annuities can be important in securing retirement income that lasts. And that’s all I will say about that one today.
There are also provisions to allows a new type of ETF that is “insurance dedicated,” we’ll keep an eye on what that is and what that means as these things go before congress for the final vote.
The final provision we’ll discuss is a plan to raise catch-up contributions for anyone aged 62-64.
Waddell shares that, “Under current law, employees who have turned 50 are permitted to make catch-up contributions under a retirement plan. The limit on catch-up contributions for 2021 is $6,500, except in the case of SIMPLE plans, for which the limit is $3,000. The Act increases these limits to $10,000 and $5,000 (both indexed), respectively, for individuals who have attained ages 62, 63 and 64, but not age 65.”
Again, these are just some of the proposals going before congress with their SECURE Act 2.0. These are the ones that seem the most impactful to the general population, though I’m sure with a 146 page bill there is something in there that will impact retirement planning in a way no one could have predicted. That’s how these bills work. Hopefully that will be for an impact for the better, but we just never know.
We’ll keep reviewing the information coming to us and when we find out more, we’ll give you an update.