What is the SECURE Act? And how could 2.0 bring further changes?

Signed into law in December 2019, the Setting Every Community Up for Retirement Enhancement Act took aim at a long-standing concern of both major political parties: the lack of access to tax-advantaged retirement plans. The SECURE Act, as it's more widely known, included a series of changes aimed at broadening the number of Americans who could use these plans and helping older Americans build their assets.

In 2022, the U.S. House of Representatives overwhelmingly passed a successor bill, commonly referred to as the SECURE 2.0 Act, that could advance these goals further if passed by the Senate and signed by President Biden.

The original SECURE Act, much of which took effect in January 2020, modified the tax code—affecting everyone from new parents to those who inherit IRAs. Here are some of the most important rule changes the legislation introduced.

Older adults who own a workplace retirement plan—including 401(k)s and 403(b)s—as well as traditional IRAs still have to take required minimum distributions, or RMDs. However, this act pushed back the age at which you have to take those distributions from 70 ½ to 72. That was welcome news for retirees, who potentially have an extra year and a half to let their investment assets grow tax deferred. However, the rule only applies to those who turned 70 ½ in 2020 or after; if you were born too early, the previous RMD rules still apply.

Prior to this act, retirement savers had to stop making contributions to an IRA when they reached age 70 ½. Since the law's passage, you can continue to put money into your account beyond that age as long as you continue generating earned income through work. Along with the delayed RMD, that amendment provides an opportunity for older adults to further build up retirement assets before making withdrawals.

The legislation also cast a larger net regarding who can contribute to an IRA. One requirement to invest through these accounts is that you have earned income. Stipends and fellowship awards for students previously didn't count, but the SECURE Act relaxed that rule to allow graduate and post-doctoral students to count those income sources as earned income.

Normally, savers face a 10% early withdrawal penalty when they pull money from a workplace plan before reaching age 59½. But there are several exceptions to that rule, and the SECURE Act added another one: welcoming a new child into your family. The law makes it possible for parents to withdraw up to $5,000 from their 401(k) or other employer-sponsored plan without incurring a penalty.

To qualify for this carve-out, the distribution has to take place within one year of the child's birth or adoption. It's important to note that parents still have to pay ordinary income tax on any amount that they withdraw. Depleting your retirement account early should be considered a last resort. Still, it's an opportunity for parents to get some reprieve from the financial responsibilities of having a new child.

Thanks to the passing of this act in 2019, more part-time employees gained the ability to contribute to workplace retirement plans. Before, workers needed to accrue 1,000 hours of service within a 12-month window in order to participate in 401(k)-style plans. Starting in 2024, those who work at least 500 hours a year for  three consecutive years can also invest through these tax-advantaged accounts. Plans began crediting service in 2021, which means the first employees to qualify under the new rule can make contributions as of 2024.

Small-business owners face a number of obstacles to providing retirement plans, including the high cost of offering this benefit. To address this hurdle, SECURE increased the maximum tax credit for setting up a new plan from $500 to $5,000.

Starting in 2021, entrepreneurs also have the opportunity to provide retirement benefits through multiple employer plans (MEP) and pooled employer plans (PEP). Making use of these outside plans can mean fewer administrative challenges for a small business, but it also involves giving up some of the control an employer would typically have in a more traditional plan.

While the law introduced a number of changes favorable to IRA owners, not everyone was better off in the wake of SECURE—among them, nonspouses who received an IRA as part of an inheritance. Before, these heirs could take smaller distributions over the course of their lifetime, reducing their annual income tax burden and allowing a big chunk of the money to continue growing on a tax-deferred basis.

The act changed that, giving many heirs 10 years to drain the IRA. There are a number of exceptions, however. The 10-year rule doesn't apply to surviving spouses, who can still take lifetime distributions. Nor does it cover disabled heirs or those who are less than 10 years younger than the original IRA owner. Minor children are also exempt until they reach the age of legal adulthood in their state, at which point the 10-year window goes into effect.

In March 2022, the House approved another bill—the Securing a Strong Retirement Act —that aims to build on many of the measures adopted in the original act. Known as SECURE Act 2.0, the bipartisan legislation would further increase access to tax-deferred retirement plans and seek to increase their utilization among employees.

If enacted, the House version of SECURE 2.0 would include:

Access to a workplace retirement plan is one thing—getting workers to contribute is quite another. More than 10% of eligible workers didn't make any contributions to their plan in 2020, according to a recent survey by the Plan Sponsor Council of America.

Supporters of SECURE 2.0 hope to change that by including a rule that would automatically enroll new employees, starting with a pre-tax contribution equal to 3% of their wages. Contributions would then increase by 1 percentage point each year until the employee contributed at least 10% — though not exceeding 15% — of their earnings. Employees would have to opt-out if they chose not to participate.

Church- and government-run plans, as well as new companies and small businesses with fewer than 10 employees would be excluded from this requirement.

The original act pushed the age for required minimum distributions to 72. The newer bill would gradually push back the age for RMDs even further— to age 73 in 2023, to age 74 in 2030 and to age 75 in 2033. It would also significantly reduce the penalty for failing to make the necessary distributions, from 50% to 25%. Additionally, investors who corrected their mistake promptly would only be required to pay a 10% fee. All in all, these changes mean there could be more time for retirees' retirement assets to grow on a tax-deferred basis.

Current IRS rules allow workers age 50 and older to contribute an additional $6,500 per year to workplace plans compared with younger employees. SECURE 2.0 would boost that "catch-up" amount to $10,000 for those between the ages of 62 and 64. It would also raise the $3,000 catch-up amount for SIMPLE IRAs to $5,000 for this same age group.

The 2019 act already expanded the number of part-time workers who could participate in a workplace retirement plan. Under that law, employees are eligible to participate in workplace plans if they fulfill one of two requirements: they worked 1,000 hours within a 12-month period or they worked 500 hours in three consecutive years. SECURE 2.0 would drop that latter requirement to two years, allowing some part-time workers to participate a year earlier.

The Saver's Credit provides tax relief to low- and middle-income taxpayers who contribute to an IRA or workplace plan. The credit amount is equal to 50%, 20% or 10% of the first $2,000 in annual contributions based on one's adjusted gross income. That equates to a tax break of $1,000, $400 or $200. SECURE 2.0 would increase the allowable Saver's Credit beginning in 2027, applying the 50% cap to all eligible individuals and couples (though higher-income earners would still be phased out).

Should SECURE 2.0 become law, it will make qualified retirement plans accessible for more Americans. On the other hand, it will also add complexity to the already intricate set of rules governing these accounts. A local Thrivent financial advisor can help you create a retirement strategy that meets your unique financial needs and helps to reduce your tax liability.