Policymakers tout recent legislation as offering a leg-up to Americans struggling to save for retirement, but one tax and retirement expert says not to believe the hype.

The SECURE 2.0 Act, enacted at the end of last year, will bring about some important changes for retirement planners—but it’s not as impactful as its predecessor, 2019’s the SECURE Act, said Ed Slott, president of Slott & Co.

“The original had massive changes that did things like eliminate the stretch IRA and give us the 10-year rule, along with a whole bunch of other rules,” said Slott, an accountant and retirement- and tax-planning expert, on SECURE 2.0: What Advisors Need to Know with Ed Slott, a recent Financial Advisor magazine webcast. “That was transformative. SECURE 2.0 is not transformative. It was over-hyped. It was not earth-shattering and there are no real game changers in there.”

What It Means For RMDs
Most attention, according to Slott, is being paid to SECURE 2.0’s change of required beginning dates for retirement distributions from qualified, tax-deferred accounts from age 72 to 73.

“Some articles have hyped headlines saying that it is going up to age 75,” said Slott. “Under SECURE 2.0, that actually doesn’t happen for 10 years, not until 2033, so let’s put that in the back of our heads because who knows where we’ll be in 2033. SECURE Act part one got rid of the 70.5 beginning date, that was great, and made it 72. Now we just go from 72 to 73.”

The only confusion, according to Slott, is in figuring out who will use age 72, 73 or 75 as beginning dates. People who have already started taking RMDs are locked-in. Those who were born between years 1951 and 1959 will have age 73 as their required beginning date for RMDs, and those born in 1960 or later will use age 75.

Of course, Slott and other tax and retirement experts are already warning advisors and clients to consider taking distributions from qualified, tax-deferred accounts like traditional IRAs and 401(k)s before the required beginning date to reduce the amount in RMDs the account holder will eventually have to pay taxes on.

“(Raising the required beginning date) is generally a good thing because it gives you and your clients more freedom before you are stuck on an RMD plan and you can do more things before RMDs start, like Roth conversions, which are best done before RMDs begin,” said Slott. While no rules prevent conversions to a Roth IRA after RMDs begin, the amount converted has to be taken out of the traditional IRA in addition to the required distribution—an RMD itself cannot be converted.

Get The Money Out
Because of the original SECURE Act’s 10-year rule for inherited IRAs, there’s a new sense of urgency around getting assets out of traditional IRAs and into Roth accounts and permanent life insurance policies, said Slott.

“There is now a finite ending (to your IRA) when all the money has to come out, everything has to come out by 10 years after death,” said Slott. “So even if you push up the RMD age further, say, if they made ti 80—what you’re also doing is shortening  the window when all of this money has to come out, and that’s not a good thing. If you have to push all this IRA money between you and your beneficiaries, it now all has to come out in a shorter period, and it will be more heavily taxed at potentially higher future rates.

“Should you wait because you have an extra year? Probably not. You want to take advantage of today’s low tax rates.”

Since the passage of the Tax Cuts and Jobs Act lowered most Americans’ marginal tax rates, Slott has noted a stronger argument for converting assets to Roth accounts and paying taxes now at what he considers historically low tax rates. Some of the provisions of current tax law are set to sunset after year 2025, adding to the sense of urgency around moving assets from tax-deferred to Roth accounts.

About The 10-Year Rule
The 10-year rule, from the original SECURE Act, has been further interpreted by the IRS, said Slott, placing the burden of annual RMDs on more IRA beneficiaries.

“They issued rules saying any beneficiary subject to the 10-year rule will also have to take RMDs for years one through nine of that 10-year term based on their own life expectancy,” said Slott. “The beneficiaries who have to do that are the ones who inherited from someone who had already started taking RMDs.”

The IRS’s decision stems from an “arcane” rule in the original tax regulations setting up tax-deferred accounts that states beneficiaries have to take distributions “at least as rapidly” as the original account owner.

Since Congress did not address this issue in SECURE 2.0, Slott said it should be considered settled law.

“Once someone starts RMDs, once the faucet is open, you cannot stop, they have to continue RMDs and then everything left comes out in year 10,” said Slott. Since the ruling was only made public last year, the IRS has issued relief to IRA beneficiaries who would have had RMDs in 2021 and 2022, waiving the 50% tax penalty for IRA beneficiaries not taking RMDs in those years.

The change in the 10-year rule only further serves to increase the urgency in converting assets to a Roth account, he said, especially if IRAs are being used as legacy vehicles.

About Those Penalties
The penalty for missing a required minimum distribution from a qualified retirement account was one of the most onerous in the federal tax code, a 50% additional levy, said Slott.

“In SECURE 2.0, that penaly has been reduced to 25% and even 10% if the missed RMD is made up,” he said. “Here’s where I worry: Almost nobody ever pays the 50% penalty. It was so hard, the IRS was super-lenient... I worry now that the penalty, even if you made up the missed RMD, now that the penalty is 10%, will the IRS be as lenient?”