How the SECURE Act Affects Your Retirement

The first sentence of the SECURE Act of 2019 defines its main purpose as “to encourage retirement savings.”¹ To achieve that purpose, the SECURE Act added flexibility to the rules for Individual Retirement Arrangements (IRAs) and 401(k) plans, along with tax incentives for saving more. It appears to have worked: Data from the U.S. Bureau of Labor Statistics shows that private industry workers’ access to retirement savings plans increased to 68% in 2021 from 48% in 2018, before the SECURE Act.^2,3

But over the same period, the percentage of American workers surveyed by the U.S. Federal Reserve who say they’re financially on target for retirement or ahead of their goals increased to only 40% (2021) from 36% (2018).^4,5 Now, in mid-2022, legislation pending in Congress would add to the SECURE Act’s retirement savings incentives, encouraging still more retirement plan growth.

This article provides an overview of SECURE Act changes that workers and employers should be aware of, along with information about the still-pending legislation. While you’ll want to consult with a financial advisor or accountant to make the best decisions for your family or small business, here are some essentials you need to know.

The Setting Every Community Up for Retirement Enhancement Act of 2019, a better known as the SECURE Act, is law that aims to help Americans save for retirement. Specifically, if you hold an IRA or 401(k) account, before the Act you were required to start making minimum withdrawals by age 70½. Now, under the SECURE Act, you can delay withdrawals until age 72. 

What’s more, if you choose, you can now keep adding to your tax-deferred retirement account every year for the rest of your life, instead of stopping at 70½. That’s helpful to millions of Americans who expect to keep working into their 70s. Employed or not, these changes will help many taxpayers shelter more assets from immediate taxation in traditional IRAs or 401(k)s, and protect more asset growth in Roth IRAs. (For more on various retirement accounts, read “Explaining 6 Key Types of Retirement Plans.”)

The SECURE Act made it easier for employers to offer retirement plans and for more employees to take advantage of them. 

• Tax credits for small businesses. Many small businesses are concerned about the cost and complexity of launching and operating a retirement plan. In their analysis of the Act, the retirement consultants at Retirement Management Services LLC (RMS) explain that for businesses with 100 or fewer employees that set up a Simplified Employee Pension (SEP), Simple plan, 401(k), or profit-sharing retirement plan, the SECURE Act offers a tax credit of $250 per individual covered, up to a maximum $5,000 credit. The Act also offers a $500 tax credit per year for three years to businesses that automatically enroll employees in their 401(k) and Simple plans.⁶ Unlike a tax deduction, which lowers taxable income, a tax credit is a dollar-for-dollar reduction in the tax owed by an individual or a business.
  
  
• Ending Multiple Employer Plan restrictions. Earlier rules allowed only businesses that shared key attributes – for example, members of the same trade association – to share a Multiple Employer Plan (MEP). The SECURE Act eliminated those restrictions. This makes it easier for multiple employers to share plans, and to rely on a single plan provider as fiduciary and administrator, offloading IRS paperwork responsibilities to them. One reason that’s a good thing: the SECURE Act also includes tougher penalties for paperwork noncompliance, according to RMS.
  
  
• Extended deadline to start a retirement plan. As one more small incentive, employers now have until April 15 of the following year to start a plan, while still qualifying for tax benefits in the preceding year.
  
  
• Expanded plan access for part-time employees. Recognizing that more people work part time now, the SECURE Act will phase in a requirement for employers to allow access to their plans to individuals who’ve worked at least 500 hours a year for three straight years and meet the plan’s age eligibility requirements. Employers won’t be required to make their own contributions on behalf of these part-timers. Individuals who’ve worked 1,000 hours for an employer over the past year are already eligible to participate. That won’t change. 

The Securing a Strong Retirement Act of 2022, commonly called SECURE Act 2.0, states as its main purpose “To increase retirement savings, simplify and clarify retirement plan rules,”7 and was passed 414 to 5 by the House of Representatives, with bipartisan support. It is now pending in the Senate. Although it may change before becoming law, its major provisions include:

• Making auto-enrollment mandatory (although employees would still be able to choose to opt out or change their contribution rate from a default 3% rate).
• Increasing the annual catch-up contribution amount that older Americans can add to 401(k) plans from a maximum of $6,500 today to $10,000, but only for those between the ages of 62 and 64. But it would require all catch-up contributions to be considered Roth contributions, meaning they would be made in after-tax dollars.
• Increase the age at which individuals must begin making minimum withdrawals from 72 to 73 beginning in 2023, 74 beginning in 2030, and 75 beginning in 2033. 

Because of its bipartisan support, some version of the SECURE Act 2.0 is expected to be enacted in the coming months.