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Ed Slott: Secure Act 2.0 Must Fix the 10-Year Rule

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What You Need to Know

  • Congress likely didn't intend for RMDs to be required in years 1-9 after an account holder's death, Slott says.

If Congress really wants to help retirees and those saving for retirement, it needs to fix the 10-year rule in the IRS’ proposed regulations on how to handle required minimum distributions under the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, according to IRA specialist Ed Slott of Ed Slott & Co.

None of the bills that are to make up Congress’ Secure Act 2.0 package include such a fix, Slott told ThinkAdvisor Tuesday in an email.

The House passed the Securing a Strong Retirement Act of 2022, known as Secure Act 2.0, on March 29. The Senate Health, Education, Labor & Pensions Committee passed by voice vote on June 14 the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg, or Rise & Shine Act, which is expected to become part of the Senate’s Secure 2.0 legislation.

The Senate Finance Committee plans to consider Wednesday the Enhancing American Retirement Now (EARN) Act, which is also intended to be included in the Senate’s version of Secure Act 2.0.

The bills from the HELP Committee and Finance Committee will be combined to make up the Senate’s Secure Act 2.0 package. The House and Senate bills must then be reconciled.

“If Congress really wanted to make a difference, they could have included a provision to clear up the SECURE Act confusion over the 10-year rule where [the] IRS now says (in the proposed regulations issued earlier this year) that RMDs would be required for years 1-9 of the 10-year term if RMDs had already begun,” Slott told ThinkAdvisor on Tuesday.

“No one, probably including Congress, thought that the 10-year rule would work like that,” Slott said.

Congress, he continued, “should insert a fix for this to clarify that the 10-year rule has no RMDs. That would be something that would affect and help more people than everything else combined in these new packages of proposals that still have a long way to go before enactment.”

Many people, Slott told ThinkAdvisor in a previous interview, “build large retirement accounts where a lion’s share — a big chunk of it — will be left over to beneficiaries and they all have to distribute it within 10 years after death.”

The 10-year rule “is the payout period by which most non-spouse beneficiaries will have to withdraw the balance in their inherited retirement accounts — technically by the end of the 10th year after death,” he said.

The 10-year rule, he continued, “has essentially replaced the stretch IRA for most non-spouse beneficiaries, resulting in more of the funds being taxed in a shorter window (the 10 years) vs. the old stretch IRA where beneficiaries could extend RMDs for decades, and the tax could be deferred over a longer period.”

As to the Senate HELP Committee’s Rise & Shine Act and the Senate Finance Committee’s EARN Act, “there’s really nothing here that people were clamoring for,” Slott asserts.

“Yes, there are a few items to help plans administratively, and adding new ways for people to access their retirement funds early, like for financial hardships or terminal illness, and new ways to amp up Roth account participation (which is in there as a revenue raiser — another sign that Congress relies on Roths for revenue),” Slott said.

The bills include “a lot of tinkering around the edges but there is nothing here that anyone would say ‘Wow, that’s a game changer!’ like the changes in the original Secure Act” of 2019.

Even the proposal to raise the required minimum distribution age “to 75 is ridiculous because it would not be effective for 10 years! Who cares about that now? Anyone age 72 now would be in their 80’s or dead by that time, but again, it sounds good enough for Congress to pat themselves on the back over.”