By: Elizabeth Witko, MAcc, MSF, and Robert N. Polans, CPA, MT, PFS
On November 6, 2020, the IRS issued final regulations containing new life expectancy tables to be used for determining Required Minimum Distributions (“RMDs”). These new tables are effective for RMDs beginning on January 1, 2022. The old tables will still apply for 2021 and no RMDs were required for 2020 due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. After reviewing improvements in mortality since RMD life expectancy tables were last updated in 2002, the IRS provided for an overall moderate reduction of RMDs utilizing these newly updated tables.
The changes to the life expectancy tables are intended to allow for the retention of greater amounts in affected retirement plans (generally IRA’s and Company plans), defer taxes a little longer and hopefully provide more retirement income to participants to account for generally longer life spans. The effective date for the new tables was delayed from 2021 to 2022 in the final regulations so account custodians and plan administrators would have enough time to update their computer systems which calculate the RMDs.
The three tables used to determine RMDs are:
The Uniform Lifetime Table is the table most used by plan owners. It is used to determine lifetime RMDs to most plan participants over the age of 72; including when a spousal beneficiary is a sole designated beneficiary but who is not over 10 years younger than the account owner or when the spouse is not the sole designated beneficiary. The Uniform Lifetime Table is also used to calculate distributions required for an individual who has inherited a tax deferred retirement account from their spouse and has selected to transfer the account into their own name.
The Joint and Last Survivor Table is only used to determine RMDs to plan participants over the age of 72 when a spouse is a sole designated beneficiary and who is over 10 years younger than the account owner.
The Single Life Table after the SECURE Act, will be used by a newly defined class of beneficiaries called Eligible Designated Beneficiaries. Eligible designated beneficiaries are defined as spouses, disabled or chronically ill individuals, minor children of the account owner/participant or someone who is no more than 10 years younger than the account owner/participant.
Accounts inherited at an account owner/participants’ passing before the SECURE Act went into effect on January 1, 2020, will continue to utilize the Single Life Table for distribution calculations and will also be affected by these updates to the tables. Finally, account owners/participants who died before January 1, 2020 and who failed to name a living beneficiary and who died after their Required Beginning Date, will also use the Single Life Table.
Non eligible designated beneficiaries that inherit an account after January 1, 2020 (the effective date of the SECURE Act), no longer use the three tables listed above and are now instead subject to the new 10 year rule, whereby the funds are now required to be withdrawn by the end of the 10th year following the year within which the account holder dies.
The revised tables will also affect individuals receiving Substantially Equal Periodic Payments (SEPPs) from IRAs or company retirement plans to avoid the 10% penalty on pre age 59 ½ distributions. The IRS Life Expectancy Tables are also utilized in the calculations of the SEPP payment amounts and the updated tables will cause a reduction of the amount permitted to be withdrawn without penalty.
- A 72-year-old IRA owner applying the Uniform Lifetime Table under the former tables would use a life expectancy of 25.6 years to calculate an RMD for calculation years up to 2021. Under the new Uniform Life Table, the IRA owner would use a life expectancy of 27.4 years for RMD calculations starting in 2022. In this example, if the account owner had a $1 million account balance on December 31, 2020, utilizing what will be the former tables, the RMD for 2021 would be $39,063. If the RMD for a 72-year-old with a $1 million account balance on December 31, 2021 was required for 2022, using the newly updated tables the RMD would be $36,496, a reduction of approximately $2,567 or 6.6%.
- A 75 year old surviving spouse who is a sole beneficiary applying the Single Life Table under the former tables would use a life expectancy of 13.4 years to calculate Required Minimum Distributions and now under the new Single Life Table will use a life expectancy of 14.8 years for years beginning in 2022. In this example, if the beneficiary of the account owner had a $900,000 account balance on December 31, 2020, utilizing what will be former Single Life Tables, the Required Minimum Distribution for 2021 would be $67,164. If the RMD for a 75-year-old with a $900,000 dollar account balance on December 31st, 2021 was being calculated for 2022 under the newly updated Single Life Table, the RMD would be $60,811, a reduction of $6,353 or approximately 9.5%.
RMDs reflect the amount required to be distributed. Owners and beneficiaries can always withdraw more than the required amount. Under the CARES Act provisions which were enacted by Congress in response to the COVID 19 pandemic, no RMDs are required for 2020. RMDs will return in 2021, absent a change in the law and will utilize the old IRS Life Expectancy Tables. However, for individuals just reaching their new Required Beginning Date of age 72 in 2020, RMDs need not be made until December 31, 2021, due to the delayed Required Beginning Date under the CARES Act. In 2022, RMDs will be calculated utilizing the updated tables and provisions from the SECURE Act. SECURE Act provisions include extended Required Beginning Date for distributions to age 72 (previously age 70 1/2) and the requirement that non-eligible designated beneficiaries comply with the 10-year distribution rule for all account assets.
Call on the Tax Warriors to assist you in tax efficient retirement planning and understanding how these Congressional and IRS updates may affect you.