How will the SECURE Act affect your long-term saving strategy?
On January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act officially became law. This important legislation aims to change the way that Americans save for retirement and access the assets they’ve saved. These changes may have a big impact on your retirement savings, even if you haven’t started saving yet.
To help you understand how the SECURE Act may affect you, we’ve put together a list of the most important points of the law that affect consumers:
12 ways the SECURE Act could impact your retirement savings
#1: Your company may automatically enroll you in a 401k at 15% of your salary
Employers already had the option of automatically enrolling employees in their 401(k) plans prior to the SECURE Act. Now, however, employers have even more incentive to adopt auto-enrollment systems to earn tax credits. The law increases the auto-enrollment annual salary allocation from 10% to 15%.
The goal of this part of the law is to increase participation in employer-sponsored retirement plans. A study of 401(k) plans offered by one of America’s leading providers (Vanguard) found that participation in auto-enrolled plans was 92% and only a small percentage of employees eventually chose to opt-out. Voluntary plan participation was only 57%.
#2: You can now keep contributing as long as you’re working
A big fear amongst retirees and retirement savers alike is outliving your retirement savings. More than half (59%) of Gen X workers fear that they will not be able to maintain their lifestyle during retirement and 55% are concerned about where their income will come from.
Under the old rules, you could only contribute to your retirement plans up to age 70.5. Now, you can continue contributing to your 401(k) for as long as you’re working and to your IRA as long as you have the income to do so. The goal is to help people avoid outliving their retirement savings, by continuing to save.
#3: If you take out a 401(k) loan, don’t expect to get the money on a credit card
Nearly 60% of Millennials and 45% of Gen Xers say that they have withdrawn funds from their retirement accounts at least once. The most common reasons are for medical emergencies, education expenses, and unemployment. However, 16% withdrew funds to make a large purchase, 13% did if to spend on themselves or their families and 7% spent the money on a vacation.
The SECURE Act aims to curb the use of retirement funds for everyday expenses and less-than-critical expenses by changing how you receive funds from a 401(k) loan. You can no longer receive the funds on a credit card or any similar lending structure. The goal is to make sure retirement funds get saved for retirement.
#4: You aren’t required to start taking money out until age 72
Another part of the law aimed at addressing fears of outliving retirement savings is changing the age that you’re required to start making withdrawals. Mandatory withdrawals used to start at age 70.5. Now, you can wait until 72 to start making withdrawals.
This is beneficial, given how many retirees are reluctant to start drawing down their assets once they retire in their mid-60’s. A 2018 survey found that only 21% felt comfortable withdrawing assets, even though all of those surveyed had over $100,000 saved. In fact, 68% of those surveyed hadn’t taken anything out at all.
#5: Long-term part-time workers may now qualify for 401(k) plans
Another big change aims to help people who are part-time workers. Previously, you were required to work a minimum of 1000 hours per year to qualify for a company’s 401(k). This prohibited millions of part-time workers from participating in these plans.
Now you can work a minimum of 500 hours per year for three years to qualify if your employer offers a 401(k). This is aimed to help working mothers, as well as retirees who may still work part-time.
It will also help young workers. One survey found that 40% of Millennials say the reason that they aren’t enrolled in their company’s 401(k) is that they don’t meet eligibility requirements, such as working a minimum number of hours.
#6: You can use some of your retirement funds to cover birth and adoption costs
While parts of the SECURE Act make it harder to withdraw funds to cover everyday expenses, other parts make it easier to withdraw funds to help with major life events.
You can now withdraw up to $5,000 from a retirement plan without any penalties to cover qualified birth and adoption expenses. This helps you avoid the 10% withdrawal penalty on taking funds out before age 59.5 from your 401(k).
The money withdrawn is still treated as taxable income, so it will still need to be reported on your tax returns for that year.
#7: You may also be able to use your funds to recover from a natural disaster
If you live in an area where a presidentially declared natural disaster occurs, you will also be able to withdraw funds from your 401(k) to help cover costs. The catch is that you’d have to share the distribution with the other employees who also take money out. The cap is $100,000 per disaster per employer-sponsored plan.
These withdrawals would also avoid the 10% early withdrawal penalty. Even better, these withdrawals would be exempt from being taxed by the IRS.
#8: You may be able to invest 401(k) assets into annuities but be careful with this!
Another change for employer-sponsored plans is the ability to invest some of your assets into annuities. Employers now have the option of offering annuities as an investment option to employees. However, they don’t have a fiduciary responsibility when doing so.
In other words, investing in these types of assets may not be good for you, but your employer holds no legal obligation to make sure they do so. Annuities can be complex, and some experts worry that savers will invest in them without fully understanding them.
If your employer begins to offer annuities as an investment option, make sure to talk to your plan consultant. You need to make sure you understand how this investment will work before you allocate any funds.
#9: There’s a 10-year time limit for withdrawing assets when someone inherits your benefits
One big part of the law that’s getting lots of news coverage is how the SECURE Act affects plan beneficiaries. If you have a retirement account, you assign a beneficiary to receive the funds after you pass away. Under the previous rules, the amounts withdrawn were based on the life expectancy of the inheritor. So, a young child could withdraw the money slowly to give them ongoing support.
Now, however, many beneficiaries are required to withdraw all funds within 10 years. There are exceptions for spouses, disabled or chronically ill beneficiaries, as well as minor children. But if you have adult children who inherit your assets, they’ll be forced to take all the money out within 10 years.
This not only limits the ongoing support of your inheritors, but it also may affect their taxes. Any money received could be treated as taxable income. That means your inheritors could face increased tax liability within that 10-year period after you pass away.
#10: It’s easier for some healthcare workers to save for retirement with IRAs
When you open an individual retirement account (IRA), you’re required to have earned income in order to make contributions. This doesn’t necessarily just mean conventional paycheck income. However, not all income counts.
For healthcare workers, “difficulty of care” pay now counts as earned income. This means healthcare workers earning this type of pay are now eligible to use it for contributing to an IRA.
#11: Grad students now have the ability to save for retirement
Another group that’s being granted entry into retirement saving is students. A student who receives stipends or non-tuition fellowship pay can now include that money as earned income. The goal is to allow grad students to start saving for retirement and accumulating assets sooner.
#12: Volunteer firefighters and medical first responders are eligible for benefits, too
Finally, retirement plans are now available as a benefit option for volunteer firefighters and emergency medical responders. These volunteers are eligible for a limited range of benefits offered by their municipal governments. Now, retirement benefits can be part of that offering.
Do Americans have enough retirement savings?
Most experts argue and studies show that the majority of Americans are behind when it comes to retirement savings. Average retirement savings lag behind what people need to retire.
A 2018 study found that households with a workplace retirement plan are only on track to replace 79% of their current income. What’s more, households without a workplace plan are only on track to replace 45%.
Most Americans really on employer-sponsored plans like 401(k) plans to save. However, experts warn that workplace plans aren’t enough. Even if you have a 401(k) through your employer, you should consider individual retirement accounts (IRAs) to help you effectively save for retirement.
The trouble is that many consumers don’t feel they’re informed enough to use IRAs. One study found that 51% of Millennials, 35% of Gen X and 20% of Boomers don’t know enough about IRAs to use one.
Debt is a big reason that Americans don’t save more
Lack of financial education is one reason Americans aren’t doing enough to save, but it’s not the biggest reason. Most Americans say that debt holds them back from saving more – or saving anything at all.
One 2018 survey found that two-thirds of Millennials have nothing saved at all for retirement. Student loan debt is the main reason why.  IN another study, only 31% of all consumers who had non-mortgage debt were able to save outside of a workplace retirement plan. 
Consolidated Credit has created a free online guide for How to Save for Retirement When You’re in Debt. It starts by focusing on employer-sponsored plan that take money out of your paycheck directly. Then you gradually increase your savings as you pay down debt, using options like an IRA. For example, when you complete a debt management program, you can use the monthly amount you were paying to set up monthly contributions to an IRA.