IRS Updates Life Expectancy Tables that Determine Required Minimum Distributions | Lord Abbett
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Retirement Perspectives

Longer life expectancy projections could mean that individuals may be able to keep more of their retirement savings in their tax-advantaged accounts over a longer time period.

Read time: 5 minutes

As a result of new retirement legislation and subsequent Internal Revenue Service (IRS) guidance, retirees and beneficiaries now have three sets of required minimum distribution (RMD) rules for 2020, 2021, and 2022.

The IRS announced in early November they’ve updated the life expectancy and distribution period to calculate required minimum distributions (RMDs) from IRAs and workplace retirement plans, such as 401(k), 403(b) and 457(b) plans. RMD rules don’t apply to Roth IRAs and any amounts in Health Savings Accounts (HSAs). This change is in addition to the CARES Act waiving 2020 RMDs and the Setting Every Community Up for Retirement Enhancement (SECURE) Act increasing the RMD age to 72 and new post-death distribution rules.

 

It’s critical that you become familiar with the changes in lifetime and post-death RMDs. Mistakes can be costly: The IRS assesses a 50% penalty tax on the amount of the RMD that should have been taken but wasn’t..

 

On November 8, 2019, the IRS issued proposed regulations for determining RMDs under Section 401(a)(9) of the Internal Revenue Code originally slated to go into effect for 2021. However, because the final regulations were issued late in 2020, IRS delayed the new tables another year to give IRA custodians & 401(k) providers ample time to program their systems. Therefore, updated Life Expectancy Tables will apply for distribution calendar years beginning on or after January 1, 2022. Thus, current IRS tables continue to apply for 2021 RMDs. The new updated tables, when effective, will be included in IRS Publication 590-B “Distributions from Individual Retirement Arrangements (IRAs).”

How will this affect your RMD?

The updated tables are in response to the fact that Americans are now living longer. The impact on retirees and beneficiaries will be modest. The new tables represent the first update since 2002 and will apply for distribution calendar years beginning on or after Jan. 1, 2022. Notably, the new regulations affect both individuals and beneficiaries taking RMDs from IRAs (including SEP and SIMPLE) and employer sponsored retirement plans. The new tables may also be used to calculate 72(t) payments (which allows penalty-free early withdrawals from your IRA), starting in 2022.

2021 RMDs will be calculated using current IRS Life Expectancy Tables.

For example, if, a retiree attains age 75 in 2021, new IRS tables would not apply to the RMD due by April 1, 2022, because that RMD relates to 2021. However, the new tables would apply to the 2022 RMD required to be taken by Dec. 31, 2022. 

Example: Eve turns 75 in 2022 and opts to take her first RMD in 2022.  Furthermore, her IRA was valued at $300,000 as of December 31, 2021.

Under the pre-2022 RMD table, Eve’s life expectancy factor would have been 22.9, and her 2022 RMD would have been $13,100 ($300,000/22.9). Under the new table, her updated (longer) life expectancy factor is increased to 24.6 (from 22.9) while her RMD is now “only” $12,195 ($300,000/24.6). A decrease of $905 (6.9%). A smaller RMD means less taxable income while more retirement savings can be retained for tax-deferred growth. Of course, Eve can always take more than her RMD.

The SECURE Act, which passed in December 2019 increased the RMD age to 72 (from age 70½). This coupled with the new RMD life expectancy regulations will not only decrease the number of annual RMDs but also (slightly) decrease the amount (required) to be distributed, thus affording retirees to keep more funds in their retirement account to account for the possibility of living longer.

The IRS’ final regulations unfortunately do not provide for automatic updates to the distribution period tables. Instead, the IRS currently expects that they will review RMD tables at the earlier of: (1) 10 years or (2) whenever a new study of individual annuity mortality experience is published.

There are 3 IRS Life Expectancy Tables used to determine RMDs.

  1. Uniform Lifetime Table - used to calculate lifetime RMDs.
  2. Joint & Last Survivor Table -used instead of the Uniform Lifetime Table when a spouse is the sole beneficiary and is more than 10 years younger than the account owner
  3. Single Life Table - used to calculate post death RMDs for beneficiaries, but only if the beneficiary is an Eligible Designated Beneficiary (EDB). An EDB is a surviving spouse; minor; chronically ill individual or disabled individual; or someone not more than 10 years younger than the account owner. All other beneficiaries (i.e. non-eligible designated beneficiaries) who inherit an IRA after 2019 are subject to a new 10-year payout rule and do not use this or any table. 

Tip: The Single Life Table is also used in situations if you die after your “required beginning date” (RBD) without naming a living beneficiary. Generally, a retirees RBD is April 1 of the year after the year you turn age 72.

Transition Rule for Non-spouse Beneficiaries

The switch to the new updated tables will be straightforward for most individuals where life

expectancies are recalculated annually.  Recalculation occurs for all lifetime RMDs and post-death payouts to a surviving spouse who was sole beneficiary. Simply, recalculate using the new table starting in 2022.

Importantly, the IRS included a transition rule for non-spouse beneficiaries who inherited an IRA prior to January 1, 2022 after RMDs have begun and who are currently using the Single Life Table. The transition provides a “reset” for the life expectancies using the new tables. Therefore, table  changes for 2022 will be more complicated.

There will be a one-time reset (“redetermination”) of the life expectancy that year. The designated beneficiary will “go back” to the year after the year of owner’s death and find his/her (i.e. beneficiary’s not the deceased) single life expectancy as of his/her age in that year using the new table. Subsequently, one year will be deducted from the new life expectancy for each year since the first distribution year to arrive at the divisor for the relevant post-2021 year.

Example:

  • Joan dies in 2020, leaving her traditional IRA to her sister Diane as a “designated beneficiary.”
  • IRA is valued at $1 million as of December 31, 2020.
  • Diane will be 57 in 2021, the year after her sister’s death.

Diane’s RMDs (from the inherited IRA) are determined using the life expectancy (Diane’s age in the year following Joan’s death) payout method referred to as a “stretch” IRA. Since Diane is not more than 10 years younger than Joan, Diane’s RMDs (from the inherited IRA ) are determined using the life expectancy method (“stretch”).

Under the current life expectancy table (still applies in 2021), Diane’s life expectancy (age 57) is 27.9 years, therefore her 2021 RMD will be $35,842 ($1,000,000/27.9). However, under the new single life table effective in 2022, her life expectancy (age 57) would increase to 29.8 years. If the new table had applied in 2021, her RMD would have been $33,557 ($1,000,000/29.8) a decrease of $2,285!  Of course, Diane can take amounts in excess of her RMD.

Example:

  • Assume that an employee died at age 80 in 2019 and the employee's designated beneficiary (who was not the employee's spouse) was age 75 in the year of the employee's death.
  • For 2020, the distribution period that would have applied for the beneficiary was 12.7 years (the period applicable for a 76-year-old under the Single Life Table and for 2021, it would have been 11.7 years (the original distribution period, reduced by 1 year).
  • For 2022, if the designated beneficiary is still alive, then the applicable distribution period would be 12.1 years (the 14.1-year life expectancy for a 76-year-old under the Single Life Table reduced by 2 years).

Source: Natalie Choate. Treas. Reg. § 1.401(a)(9)-9(f)(2)(ii)(B): “Example of redetermination”

Advisors, for additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY

Required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Rule 72(t) is an IRS rule that allows exceptions to the early-withdrawal tax for IRA owners to withdraw funds from their retirement account before age 59½, as long as certain qualifications (known as SEPP regulations) are met. In this rule, the retirement account owner must take at least five substantially equal periodic payments (SEPPs), and the amount of the payments depend on the owner’s life expectancy as calculated through IRS tables.

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