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Secure Act 2.0 Rules Leave Ed Slott, Advisors Puzzled

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What You Need to Know

  • Secure 2.0 increases the RMD age to 73 starting on Jan. 1, 2022, to 74 starting on Jan. 1, 2029, and to 75 starting on Jan. 1, 2032.
  • According to IRS data, 80% of people who take the RMD amount or more do so because they need the money, says retirement expert Ed Slott.
  • The Federal Reserve says the average 64-74 year old has $358,000 saved for retirement, with the median amount at $126,000.

The House Ways and Means Committee’s recent passage of the Securing a Strong Retirement Act of 2021, dubbed the Secure Act 2.0, has spurred rounds of applause in the retirement planning community, but some provisions have left advisors scratching their heads. 

Secure 2.0 raises the required minimum distribution age from 72 to 75 over 10 years, expands automatic enrollment in retirement plans and enhances 403(b) plans, among other provisions, and is now on its way to the full House.  

Committee Chairman Richard Neal, D-Mass., said May 5 during the markup that he is “really proud of this bipartisan work.” 

IRA and tax specialist Ed Slott of Ed Slott & Co., said that the unanimous passage of the bill by Ways and Means signals likely passage by the full House. “There’s nothing politically controversial in here,” he said. 

RMDs Expanded

One of the most talked-about provisions of the bill is the increase in the required minimum distribution age from 72 to 75. 

Under current law, participants are generally required to begin taking distributions from their retirement plans at age 72, an increase ushered in by the Secure Act.

Secure 2.0 increases the RMD age to 73 starting on Jan. 1, 2022; to 74 starting on Jan. 1, 2029; and 75 starting on Jan. 1, 2032.

Eric Walters, managing partner and founder of Summit Hill Wealth Partners in Greenwood Village, Colorado, told me in an email that he believes Secure 2.0 “is a good step towards helping Americans save more for retirement and adjusting our system for increases in lifespan and investment options.”

Walters opined that “slowly increasing the start date of required minimum distributions from 72 to 75 allows workers to continue to work and earn money towards retirement while controlling when and how they use their retirement funds.”

Slott, however, reiterated his view that raising the RMD age is confusing. “This whole business with raising the RMD age — it went from 70 ½, the Secure Act put it to 72, that confused a lot of people; … then they [Congress] say they’re going to go to 73, then 74, then 75 in 10 years — that’s a long way out, a lot of changes.”

He added: “My feeling is they should just kill lifetime RMDs all together; there’s no need for any age, for anybody to take lifetime RMDs anymore; [Congress] took care of that in the Secure Act when they put it [at a] 10-year end date for most non-spouse beneficiaries.

“So the money has to come out — other than a spouse, for non-spouse beneficiaries by the end of the 10th year after death,” Slott continued. “So why bother raising the age and causing all these complications and annoyances for other people?”

That said, raising the RMD age does have “some advantages,” Slott continued. “But the longer you put it off, the larger the IRA grows and the more has to come out once you hit 73, 74 or 75,” he said. “So people could be facing larger bills later in life as the account grows. But for most people it doesn’t help.”

According to the IRS, 80% of the people “take the RMD amount or more because they need the money,” Slott said. “So telling them they don’t have to take money they need doesn’t do anybody any favors. It only helps the people who don’t need the money, which means they probably have larger IRAs and they’ll be facing bigger tax bills later.”

Confusing Rules

Kristin McKenna, managing director at Darrow Wealth Management in Boston, said that while “allowing individuals to save more for retirement is clearly a good thing … the way the bill has proposed accommodating that is likely to confuse many investors.”

For instance, it may be a challenge for them to fully grasp details about “the annual indexing for catch-up contributions, what you can contribute at 50 versus from 61 to 62, and the various RMD breakpoints over the next 11 years.” Said McKenna: “With so many rules to remember, I’m unsure whether these new limits would be utilized in scale, if passed.”

Also, McKenna opined, “raising the RMD age would only put added pressure on generating additional tax revenue from income or capital gains. I don’t think the cost-benefit is there for most workers, especially when there’s no telling what the tax code will be when the RMD age applies to them.”

Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Michigan, said Secure 2.0 “will let us potentially take money out later (at 75) [and] put more in (in a weird rule for 62-64-year-olds, but not 65).

“The catch-up for 62-64 is great, but makes no logical sense. We now have another ‘donut hole’: I can do a ‘regular’ make-up from 50 to 61, increase it from 62 through 64 and drop it back by 65,” LaBrecque explained. 

“I’m perplexed by the 65 rule: It has no correlation to other provisions (except Medicare, which is illogical),” he added. “If you were 65 in 2021, you were born in 1956, and as such, can’t even collect your full Social Security benefit. The drafters should just allow an enhanced make up for 62 and older.”

From a policy perspective, however, it “is great idea to allow more older Americans to save more,” LaBrecque continued. “Too many people are no longer in defined benefit plans and will rely on savings to retire.” 

A Federal Reserve Survey of Consumer Finances shows “that the average 64- to 74-year-old has only $358,000 saved for retirement (median is a scary $126,000),” he said. “With inflation rearing its ugly head, we need to save more and this helps.”

Living Longer

Sarah Carlson, an advisor at Fulcrum Financial Group in Spokane, Washington, opined that raising the RMD age and expanding the automatic enrollment for retirement plans “makes sense,” as “people are living so much longer than their ancestors and many need to work longer to build up assets for non-working years.”

Too many people, she said, “are not prepared for the rising cost of living and long-term care costs.”

Secure 2.0 requires 401(k) and 403(b) plans to automatically enroll participants when they become eligible; employees may opt out of coverage. The initial automatic enrollment amount is at least 3% but no more than 10%, then each year that amount is increased by 1% until it reaches 10%.

All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., have been in business for less than three years), church plans and governmental plans.

“This change could have a massive impact on how well prepared Americans will be for retirement in coming decades,” Summit Hill’s Walters said.