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.
What Your Peers Are Reading
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.”