Spending Bills Affect Inherited IRAs and Medical Deductions

There is nothing  the U.S. Congress seems to like more than must-pass legislation. The year-end spending bills passed this week are no exception. They contain a grab bag of amendments tucked in by various legislators. Among them are the Setting Every Community Up for Retirement Enhancement (SECURE) Act and a reduction in the floor for deducting medical expenses. The bills had yet to be signed as of this morning, but President Trump is expected to do so according to news reports.

I’ll start with the medical deductions, because it’s quicker to explain than the SECURE Act, which effectively ends the ability to stretch IRAs over an extended period of time. Under existing law, qualified medical deductions cannot be deducted unless they exceed 10.0% of adjusted gross income. This floor has been lowered to 7.5% for “taxable years beginning before January 1, 2021.”

The floor for this year had been 10%. If you didn’t think you would reach this level and were intending to postpone realizing certain medical expenses until 2020, you may want to quickly rerun your numbers. With the lower threshold, it may make sense to realize those expenses by December 31 of this year. Qualified expenses include hearing aids (including batteries and maintenance), eyeglasses, contact lenses and even bandages. Mileage for medical treatment is also deductible. See IRS Publication 502 for the full list of qualified expenses.

Now onto the SECURE Act. This legislation had been stalled in the Senate for several months even though it had bipartisan support. It contains many positives but will throw a wrench into the estate plans for some of you by shortening the time withdrawals must be taken from inherited IRAs by most (but not all) non-spousal beneficiaries.

Non-spousal beneficiaries must withdraw the assets held in an inherited IRA within 10 years. Exceptions will exist for those who are minors, disabled, chronically ill or not more than 10 years younger than the deceased owner of the retirement account. These new rules apply to retirement accounts where the owner has died after December 31, 2019.

Previously, IRAs could be stretched by bequeathing the account to a younger relative. The inheritor would then stretch out withdrawals over their lifetime. Doing so extended the period of time the assets held in the account were not subject to taxation beyond mandatory withdrawals. The SECURE Act effectively ends this practice. While troublesome for estate planning, the U.S. Supreme Court did previously issue an opinion specifically describing inherited IRAs as not being retirement accounts.

I would suggest that those of you who could be affected by this change speak to your estate attorney, including those who have a trust listed as the IRA’s beneficiary. If you’re interested in reading more about the potential impact of the legislation on inherited IRAs, I suggest Jamie Hopkins’ commentary on Forbes.com and Jeff Levine’s thread on Twitter. (You don’t need to have an account on Twitter to access it. Be sure to scroll down after the first tweet, as Levine wrote 34 posts about the SECURE Act.)

The SECURE Act does contain several positives. Part-time workers will be allowed to participate in 401(k) and similar employer-sponsored retirement plans. The age limit for making contributions to a traditional IRA has been repealed. It is currently age 70; after December 31, 2019, there will be no age limitation. You will still need earned income, however. The age when required minimum distributions (RMDs) must start will be raised from 70½ to 72. This change in age will “apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date.” Notably, qualified charitable distributions (QCDs) will continue to be allowed once a person turns age 70½; the minimum age is not being raised.

After the legislation is signed into law, we’ll add an addendum to our tax guide. We’ll also update the mileage deductions for 2020 once the IRS releases them.