How the SECURE Act Changed Retirement Savings Options

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.

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.

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.

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.