The SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 was signed by President Trump on December 20, 2019, and makes significant changes to the retirement landscape.

The SECURE Act aims to help Americans more effectively prepare for retirement and maximize their savings. With at least 42.6 million households in the U.S. having IRAs and over 55 million participants in 401(k) plans, it’s safe to say many Americans will be affected in some way by the new rules.

In short, there are seven key areas of SECURE to be aware of and understand:

1. Affects all qualified plans, including 401(k), 403(b), 457(b), 401(a), ESOPs, cash balance plans, lump sums from defined benefit plans and IRAs.
2. Changes the Required Minimum Distribution age from 70 ½ to 72.
3. Allows for contributions to traditional IRAs after age 70 ½.
4. Allows part-time workers to enroll in 401(k) plans and expands benefits for debt-ridden students and new parents.
5. Allows small employers to join together to provide 401(k) plans for employees.
6. Provides the ability for 401(k) plans to provide annuities as a payout option for lifetime income.
7. Eliminates the "stretch" IRA distribution regime for inherited IRAs and replaces it with a 10-year rule. That means the maximum period over which an inherited IRA can be withdrawn is 10 years for most non-spouse beneficiaries. This requirement eliminates the current stretch provision in qualified plans and IRAs, which allowed beneficiaries to take distributions over their expected lifetimes.

This last provision is significant. According to the Congressional Budget Office, the stretch elimination will cost taxpayers at least $15 billion in accelerated taxes. Heirs will need to pay taxes faster and in many cases at higher tax rates since they will now have to distribute the entire inherited IRA within 10 years.

It is now more important than ever for individuals with larger IRA balances to plan for the distribution of those balances after their death. Planning likely will be most beneficial for those with total retirement account balances greater than $400,000.  

It’s important to note that the stretch elimination, and consequent 10-year rule, applies to all types of IRAs and 401(k), 403(b), 457(b), cash balance and lump-sums — anything that could end up in an IRA. The rule does not apply to the spouse of the IRA owner, minor children, disabled or chronically ill beneficiaries, or beneficiaries within 10 years of age of the IRA owner.

Other areas that will need to be addressed in light of SECURE include:

• Estate planning and coordination of the plan with beneficiary designations, and
• Roth IRA strategies, such as using contributory Roth’s for younger workers or children with earned income; and designated Roth Account (Roth 401(k)) for earners, especially pass-through owners, to help maximize the Qualified Business Income Deduction.

Cohen & Company and Sequoia Financial Group have prepared a guide specifically addressing the elimination of the stretch qualified plan/IRA. Download the full guide, which includes a helpful checklist and case studies, or the one-page summary.

Contact Scott Swain at sswain@cohencpa.com, Leon LaBrecque at llabrecque@sequoia-financial.com or Heather Welsh at hwelsh@sequoia-financial.com, authors of the guide, to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.