What is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a bipartisan bill designed to aid Americans' ability to save for retirement. The bill seeks to improve the country's retirement prospects. The bill passed the U.S. House of Representatives in a 417–3 vote in July 2019 and then by the Senate as part of the Dec. 19 spending and tax-extension bills. It was signed into law by President Donald Trump on Dec. 20, 2019.

Understanding the SECURE Act

The SECURE Act is designed to ease the looming retirement savings crisis by:

  • Making it easier for small businesses to offer their employees 401(k) plans by providing tax credits and protections on collective Multiple Employer Plans
  • Allowing retirement benefits for long-term, part-time employees
  • Removing maximum age limits on retirement contributions, formerly capped at age 70½ 
  • Raising the required minimum distribution (RMD) age to 72 from 70½ 
  • Allowing penalty-free withdrawals up to $5,000 from retirement plans for the birth or adoption of a child
  • Relaxing rules on employers offering annuities through sponsored retirement plans
  • Allowing penalty-free withdrawals of up to $10,000 from 529 education-savings plans for the repayment of certain student loans
  • Revising components of the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans
  • And to raise an estimated $15.7 billion to pay for these changes: removing the stretch IRA estate-planning strategy that permits non-spouse beneficiaries of IRAs to spread disbursements from the inherited money over their lifetime. The new limit will be within 10 years of the death of the original account holder.

The Rationale for the SECURE Act

The bill was drafted to address Americans' difficulty in saving and investing 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 have less than $25,000 saved. Given longer life expectancies than previous generations, coupled with the rate of inflation, a minimum balance of $1 million+ is recommended for retirement accounts by the date one plans to stop working.

$1 million

The recommended minimum amount of retirement savings needed to live comfortably

Part of the problem has been attributed to the shift away from defined-benefit plans, in which an employer guarantees a payout to employees after they retire, to defined-contribution plans, in which an employee saves on their own for retirement, often with the employer contributing a pre-set amount to the employee's retirement fund.

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, retirement savers are required to withdraw a set amount from their retirement savings vehicles each year, in what's referred to as a required minimum distribution (RMD). The SECURE Act raised this age from 70½ to 72. Delaying the age of required distribution means delaying both the tax burden of withdrawals and the drawdown on 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 has been under consideration in the Senate, but the SECURE Act is the legislation that actually passed and became law.