From SECURE 1.0 to SECURE 2.0
At the end of 2019, then President Donald Trump signed the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, into law. Part of a general government spending package, this overhaul to tax credits, 401(k) plans and lifetime income investments among other aspects, marked the first change to laws around retirement income in over a decade.
Small businesses are now being incentivized to offer retirement planning options for their employees. SECURE provides a tax credit that’s equal to 50% of their retirement plan startup cost. This was designed to address one of their main concerns regarding the funding of retirement plans: cost.
401(k) plans also received new features. The biggest change however was to Required Minimum Distributions or RMDs. RMDs refer to the minimum amounts that U.S. tax law requires Americans to withdraw from traditional IRAs and employer-sponsored retirement plans. While several changes were significant, such as a penalty-free distribution for up to $5,000 for the birth of a child or adoption, the change most noticeable to Americans was the increase to age 72 of when distributions needed to begin.
When it came to lifetime income investments like annuities, companies were allowed to add annuities to 401(k) plans. If employers met certain qualifications, SECURE would protect them from liability if an annuity provider wouldn’t be able to pay or experienced significant losses.
Right after the SECURE act was signed into law, lawmakers moved to extend some of the existing provisions and reinforce the need for an even more extensive overhaul of retirement legislation. As the pandemic changed the economic outlook for Americans across the country, SECURE 2.0 started to make its way through the legislative process and was Signed into law by President Biden in December of 2022. The biggest change being the hike of the RMD age from 72 to 75. Through economic struggles and the changing landscape of Social Security and concerns over funds being available to Americans, SECURE 2.0 would bring sweeping changes to redefine how Americans save for retirement.
SECURE 2.0 and Major Changes to How American can Save for Retirement
One of the reasons that drove legislators to work on changing America's retirement system was a simple causal equation. The Bureau of Labor estimates that by 2030 the number of people age 75 years and older who will be working or looking for work is expected to grow by over 90%. 60% of Americans surveyed as part of an Insured Retirement Institute (IRI) study that are nearing retirement or already retired are worried or do not believe income will cover expenses during retirement.Taking these numbers into consideration, Social Security and retirement savings are not enough for older Americans to get by. In its essence, the SECURE Act of 2019 and 2022 are attempts to curb a retirement savings shortfall and incentivize Americans to make saving for retirement a priority.
The first step for SECURE 2.0 was to create a law that would make employees and employers more aware of how to save for retirement and the tools at their disposal. A critical component was automatic enrollment in retirement plans at a rate of at least 3%. Employees would still be able to opt out but are now immediately made aware of an option to save for retirement. Connected to those changes is the added responsibility for employers to provide more protections in the event of an emergency for employees. This is realized through an emergency savings account that’s linked to a company’s retirement plan. Beginning in 2024, employees can make after-tax contributions to a savings account inside their existing retirement plan. Those balances then must be available to be withdrawn at least once a month (providing employees have a qualifying emergency cause). Much like the 401(k) enrollment, employees are automatically enrolled at no more than 3% of their wage but can opt out. Considering studies show that most Americans are not financially prepared for an emergency and struggle to meet financial obligations, this is an important addition to help Americans address emergencies without dipping into retirement savings.
The RMD age is increased to 73 in 2023 and will go up to 75 in 2033. A penalty reduction if an RMD is not taken can also make a difference for retirement savers.
Early withdrawals from retirement plans are typically connected to penalties and other factors that can impact their financial viability. SECURE 2.0 includes several exemptions that eliminate penalties in certain cases. These are related to terminal illness, environmental disaster, domestic abuse and more.
What SECURE 2.0 Means for Guaranteed Income
Fixed index annuities can help address a common concern among pre-retirees and retirees, a guaranteed retirement income with benefits like tax-deferral. As part of the IRI study, both groups expressed interest in annuities once their benefits were explained and 87% of near-retirees surveyed were likely to purchase a financial product described as a fixed indexed annuity.By offering annuities as an option for 401(k) plans, more people are going to be aware of their benefits and potential inclusion in retirement plans.
Here are the key provisions from SECURE 2.0 impacting annuities:
- Increased age for RMDs means a potentially higher monthly income from the annuity.
- Qualified Longevity Annuity Contracts or QLACs are easier to invest in. These annuities provide regular income payments based on the amount you've deposited in the annuity. SECURE 2.0 eliminates the current QLAC investment cap of 25% of retirement savings and raises the investment maximum from $145,000 to $200,000.
Like other laws and legislation, The SECURE Act will likely undergo more modifications in the years to come. As of 2023 and moving forward, it’s become a solid first step to provide more retirement readiness to Americans via already existing vehicles (annuities, 401(k)) and strengthens the awareness of pre-retirees and retirees of what’s possible through the contributions they’ve chosen to make to enjoy a more secure retirement.
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Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit. Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
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