The SECURE Act of 2019 Becomes Law

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This May 2019, the SECURE Act was introduced and passed in the House in a matter of days. Since then, we have been waiting to see what the Senate would do with it. As it turns out, the SECURE Act was merged into Division O of H.R.1865 – Further Consolidated Appropriations Act, 2020 (the 2020 budget bill) which has been making its way through the House and Senate since late October.

Then on December 20, 2019, H.R. 1865, which carried the SECURE Act in it, was signed into law.

Overview

The final text of the SECURE Act portion is effectively identical to what originally passed in the House. The major effects of the act are:

  • The maximum IRA contribution age was repealed.
  • After December 31, 2019 the new required beginning date for required minimum distributions is the year you turn age 72.
  • Only “an eligible designated beneficiary” is permitted inherited IRA stretch provisions while others must distribute in 10 years.
  • You are permitted penalty-free IRA withdrawals after a child’s birth up to $5,000.
  • Student loan repayments and apprenticeship programs are qualified education expenses for distributions after December 31, 2018.
  • The “pooled employer plan” was created which will change how employer sponsored plans are run.

You can read more about the details of each of these factors in our initial article “IRA Reform on Horizon – SECURE Act of 2019” and in our upcoming articles.

In addition to these SECURE Act provisions, there are two other items of note which were either merged into this bill in “Division Q – Revenue Provisions” or are brewing in upcoming proposed IRS regulations.

Favorable Medical Expense Deduction for All Ages until 2021

Prior to this new bill, Section 213(f) of the U.S. Code read:

(f) Special rules for 2013 through 2018
In the case of any taxable year—
(1) beginning after December 31, 2012, and ending before January 1, 2017, in the case of a taxpayer if such taxpayer or such taxpayer’s spouse has attained age 65 before the close of such taxable year, and
(2) beginning after December 31, 2016, and ending before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by substituting “7.5 percent” for “10 percent”.

This meant that by default before 2017 only those over age 65 were permitted to use the easier 7.5% of AGI threshold for the medical expense itemized deduction. Everyone else needed to use a 10% of AGI threshold. There was a special exception that let everyone use the 10% of AGI threshold, which was expiring.

However, the final version of this new law reads:

SEC. 103. REDUCTION IN MEDICAL EXPENSE DEDUCTION FLOOR.
(a) In General.–Section 213(f) is amended to read as follows:
“(f) Temporary Special Rule.–In the case of taxable years beginning before January 1, 2021, subsection (a) shall be applied with respect to a taxpayer by substituting `7.5 percent’ for `10 percent’.”.
(b) Alternative Minimum Tax.–Section 56(b)(1) is amended by striking subparagraph (B) and by redesignating subparagraphs (C), (D),
(E), and (F), as subparagraphs (B), (C), (D), and (E), respectively.

(c) Effective Date.–The amendments made by this section shall apply to taxable years ending after December 31, 2018.

With this new amendment, everyone regardless of age is permitted to use the 7.5% of AGI threshold for the medical expense itemized deduction until the end of 2020.

Education Expenses Deduction for Middle Class AGIs

Section 222 created “a deduction… equal to the qualified tuition and related expenses paid by the taxpayer during the taxable year.” The qualified tuition and related expenses was defined as:

The term “qualified tuition and related expenses” means tuition and fees required for the enrollment or attendance of—
(i) the taxpayer,
(ii) the taxpayer’s spouse, or
(iii) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151,
at an eligible educational institution for courses of instruction of such individual at such institution.

Prior to the SECURE Act, Section 222(e) read, “This section shall not apply to taxable years beginning after December 31, 2017.” Meaning the deduction went away in 2018.

However, the final version of this new law amends:

SEC. 104. DEDUCTION OF QUALIFIED TUITION AND RELATED EXPENSES.
(a) In General.–Section 222(e) is amended by striking “December 31, 2017” and inserting “December 31, 2020”.
(b) Effective Date.–The amendment made by this section shall apply to taxable years beginning after December 31, 2017.

This means that until 2021, tax payers with an AGI below $80,000 ($160,000 for joint returns) are permitted this education expenses deduction again. Because of the phrasing of this amendment, you could also theoretically amend your 2018 tax return to include retroactively this deduction if you had such expenses and qualified for the deduction.

New Life Expectancy Tables / RMD Divisors

Separate from the SECURE Act or other portions of this new bill, the IRS has been given the green light to update the Life Expectancy Tables, which are used to create the required minimum distribution (RMD) divisors.

Their current proposal has been drafted and is up for comments and hearings until the end of January 2020.

With the passing of the SECURE Act, the tables used for inherited IRAs will only apply to “eligible designated beneficiaries” (a select few). This makes the Uniform Lifetime Table the most important table for the average family while the Joint and Last Survivor Table matters for couples where there is more than 10 years of age difference.

Under their new proposal, the age 72 Uniform divisor would be 27.3 (a 3.663% withdrawal) whereas under current regulation the divisor is 25.6 (a 3.906% withdrawal). This slight change means that 0.243% more of the end-of-year account value can remain in the traditional IRA in the first year of RMDs. This sort of small change is represented across every year’s divisor.

Although small, this change will be able to produce savings over time thanks to the power of compound interest.

The IRS proposed regulation states, “The life expectancy tables and Uniform Lifetime Table under these proposed regulations would apply for distribution calendar years beginning on or after January 1, 2021.”

This means that starting in 2021 everyone with RMDs will need to look to the new IRS tables and will be able to keep more of their assets tax-sheltered for longer.

Photo by Timothy Eberly on Unsplash

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Chief Operating Officer, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine