Ed Slott: Secure Act 2.0 Reduces ‘Draconian’ RMD Penalty, Broadens Roths

A sweeping retirement bill, the Securing a Strong Retirement Act of 2022, or Secure Act 2.0, that passed the House late Tuesday increases the required minimum distribution age from 72 to 75 in stages — over 11 years — and reduces the 50% penalty for missing an RMD, Ed Slott of Ed Slott & Co. told ThinkAdvisor on Wednesday.

The bill, which passed the house by an overwhelming 414-5 vote and is expected to be taken up soon by the Senate, also includes “lots of ‘Rothification,’” Slott said, “meaning Congress is stepping up Roth contributions.”

Why/?

“To bring in more revenue, of course,” he continued. “This is just more evidence of why Congress loves Roth IRAs; because Roth funds bring in money, since no deductions are available for contributions. The proof once again in this bill is in the ‘Revenue Provisions’ at the end of the bill. This is how Congress expects to raise funds to cover the cost of everything else in this bill.”

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The revenue provisions include allowing Roth versions of SEP and SIMPLE IRAs, Slott explained, “as well as requiring catch-up contributions to be made to Roth accounts, and to allow employers to offer matching contributions to Roth accounts.”

Secure 2.0 also reduces “the draconian 50% penalty for missing an RMD, to 25% (which is still high) and to 10% if the missed RMD is timely made up,” Slott explained. “In reality though, most people don’t pay this penalty, because the IRS will usually waive it if the missed RMD is made up upon discovery, and Form 5329 is filed to request the penalty waiver.”

Raising RMD Age

Under the bill, the RMD age would “increase from the current age 72, to 73 next year, then to age 74 in 2030, and to age 75 in 2033,” Slott said. “Some people will die waiting for that change. At this point Congress should just get rid of lifetime RMDs and stop annoying seniors with these changing calculations every year, especially now since most of these retirement accounts will have to be emptied by 10 years after death anyway.”

Raising the RMD age “won’t help 80% of the people who according to Treasury’s own data take more than the minimum anyway, because they need the money,” Slott continued. “So what good does it do to tell people that they don’t have to withdraw funds until later age if they need the funds to live on?”

For those who have the means to let their retirement funds grow longer, “raising the RMD age means that more funds will have to be withdrawn in a shorter window, likely increasing the tax bill later on and for heirs under the 10-year rule,” Slott said.

J. Mark Iwry, the head of national retirement policy during the Obama-Biden administration and now a non-resident senior fellow at the Brookings Institution in Washington, added in a Wednesday email to ThinkAdvisor that “the revenue proposed to be spent on repeatedly raising the RMD beginning age would be better targeted to help middle class Americans by totally and permanently exempting from RMDs all savers with less than a specified amount of retirement savings at age 72.”

Catch-Up Contributions, QCDs and More

Other notable provisions in the bill, according to Slott, include:

• Higher catch-up contributions, “but strangely” only for those ages 62, 63 and 64, Slott said. Secure 2.0 “provides for indexing the $1,000 IRA catch-up limit (for age 50 or over). This $1,000 was statutory, and was never increased over the years. Now it will be, allowing higher IRA and Roth contributions for those age 50 or over.”
• Qualified charitable distributions are indexed for inflation. “The QCD is a great tax saving provision for IRA owners or beneficiaries who are age 70 ½ or older. The QCD limit is currently $100,000 per year, but this bill raises that limit by indexing it to inflation, as soon as this bill is enacted,” Slott said. It also “allows a one-time QCD of $50,000 for split interest entities like [charitable remainder trusts], and charitable gift annuities (which currently are not allowed under the law).”
• “More access to 403(b) funds for hardships like the provisions currently available to 401(k)s, but these distributions would still be subject to tax and the 10% early distribution penalty,” Slott said.
• A new exception to the 10% early distribution penalty for domestic abuse is also included.

House Ways and Means Chairman Richard Neal, D-Mass., said late Tuesday in a statement that Secure Act 2.0 — which passed the House Ways and Means Committee last May — also expands automatic enrollment in 401(k) plans by requiring 401(k), 403(b) and SIMPLE plans to automatically enroll participants upon becoming eligible, with the ability for employees to opt out of coverage.

“Expansion of automatic enrollment will significantly increase participation in retirement savings at work,” he said.

H.R. 2954 also enhances the startup credit, “making it easier for small businesses to sponsor a retirement plan,” Neal said.

Senate Passage

Overwhelming passage of Secure Act 2.0 in the House likely signals the bill is on track “to skate through the Senate,” Slott opined, “if Congress doesn’t lard it up with other controversial items.”

Slott sees Secure 2.0 likely being attached to must-pass legislation — such as the budget bill — which would likely get a vote later this year.

The Insured Retirement Institute, an annuity trade group, said Wednesday in a statement that the group anticipates that the Senate Finance Committee will hold a hearing on Secure 2.0 and then hold a vote after Congress’ Easter recess.

“Bipartisan proposals and support exist in the Senate and we are optimistic that a Senate bill will be passed and then a final package presented to President Biden for signature later this year,” IRI said.

John Carter, president and chief operating officer of Nationwide Financial, said Wednesday in a  statement shared with ThinkAdvisor that the Senate should incorporate into this package the Enhancing Emergency and Retirement Savings Act, S. 1870, “which would allow families access to penalty-free retirement funds should an emergency arise.”

Pictured: Ed Slott. (Photo: Natalie Brasington)