Include a transition rule that applies if an employee died before Jan. 1, 2022, and, under the rules of Treas. For some time now, it has been expected that the IRS would revise its roughly 20-year-old life expectancy tables that have been used to calculated required minimum distributions. Obviously, it depends on the size of the account, but the first-year impact on an IRA as large as even $1 million would be fairly inconsequential. Similarly, when Jack was 42, his factor was 43.6 – 2 = 41.6 . Thus, it would be calculated using the existing life expectancy tables effective in 2020, and not the new life expectancy tables effective in 2021 (even if that 2020 first RMD is taken in2021!). And many (in fact, most) actually do. Will the IRS’s proposed changes to the Uniform Lifetime Table (and to a lesser extent, the Joint Life and Last Survivor Expectancy Table) create a tax-savings bonanza? For 2020, the distribution period that applies for the beneficiary is 12.7 years (the period applicable for a 76-year-old under the Single Life Table in formerly applicable §1.401(a)(9)-9), and for 2021, it is 11.7 years (the original distribution period, reduced by 1 year). Notably, the factor for a 48-year-old using the Single Life Expectancy Table in the Proposed Regulations is 38. The new changes still need to go through a formal approval process and are not scheduled to be implemented until the 2021 tax year. The fact that these changes have actually been proposed, however, is big news. Perhaps surprisingly, not really. Clarice is in the 22% Federal income tax bracket, and like clockwork, she earns a 6% gross rate of return annually for both her IRA and her taxable account investments. But this is NOT the correct factor for Jack. By contrast, under the proposed changes to the Uniform Lifetime Table, the same individual would calculate their first required minimum distribution by dividing their 2018 year-end balance by 29.1. Under the existing Single Life Expectancy Table, the life expectancy factor for a 40-year-old is 43.6. Within 180 days of the date of this order, the Secretary of the Treasury shall, consistent with applicable law and the policy set forth in section 1 of this order, examine the life expectancy and distribution period tables in the regulations on required minimum distributions from retirement plans (67 Fed. More specifically, Section 2(d) of the Order stated: Updating Life Expectancy and Distribution Period Tables for Purposes of Required Minimum Distribution Rules. Ultimately, the key point is that, while updates to the life expectancy tables have been a long time coming (especially since other tables – like those used by the IRS to analyze life insurance contracts – have already been updated to reflect longer lifespans years ago), the proposed changes simply won’t make much of a difference for the vast majority of retirement account holders and beneficiaries. Reg. By calculating her account balances with these new RMD factors, Clarice will have roughly $916,000 in her IRA, and about $1,364,000 in her taxable account by the time she reaches age 95. Using the Single Life Expectancy Table, Jack determined that his first-year factor to calculate RMDs from the inherited account was 43.6. That’s because it’s the table that is generally used to determine the life expectancy factor for calculating RMDs during an account owner’s lifetime. The information provided by Fidelity Investments is general in nature and should not be … With the waiver of 2020 RMDs under the CARES Act, what are thoughts on the formula for calculating 2021 RMDs from an Inherited IRA using the Single Life Expectancy Table? The final regulations, life expectancy tables and Uniform Lifetime Table will become effective on the date they are published in the Federal Register (scheduled to take place on Nov. 12, 2020) and will apply to distribution calendar years (as defined in Treas. Though data from other sources, such as the Investment Company Institute’s research paper “The Role of IRAs in US Households’ Saving for Retirement, 2018” (in which some 93% (!) Surely, there has to be a sizable impact of these updates when looked at in totality, right? Life Expectancy (in years) Age of. Sometimes referred to mortality tables, death charts or actuarial life tables, this information is strictly statistical. Assuming that the proposed tables become effective, it will have been 19 years (2021 – 2002) since these have changed, and they would reflect a longer life span overall. Announcing the 2020 NAPA Top Women Advisors! In response to these increases, the IRS has received a number of requests to consider revising and updating its life expectancy tables, which are used to calculate RMDs from retirement accounts. For 2020, the distribution period that applies for the beneficiary is 12.7 years (the period applicable for a 76-year-old under the Single Life Table in formerly applicable §1.401 (a) (9)-9), and for 2021, it is 11.7 years (the original distribution period, reduced by 1 year). Thus, the age at which a beneficiary must begin taking distributions is determined primarily by the age they are at the time that they inherit (as opposed to those taking lifetime RMDs, which ‘always’ begin at age 70 ½ [unless the still-working exception applies])! Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. Thus, lowering future RMD amounts may potentially only benefit about 20% of all retirement account owners who, according to the IRS, appear to have enough wealth and/or other income to be able to take only the new, lower proposed minimum distributions amounts going forward. On the other hand, it is fair to argue that the new table will give a 40-year-old beneficiary an additional two years of tax-deferral for their inherited funds, as the life expectancy factor is, indeed, just over two years longer. Specifically, according to data provided by the IRS, of the Americans who are required to take distributions from retirement accounts, only roughly 20% are taking no more than the minimum required. While the befuddlement of retirement account owners should be kept to a minimum, the greatest source of confusion may be for those retirement account owners turning 70 ½ next year, in 2020, but who wait until (as late as April 1,) 2021 to take their first distribution. For those who are eligible to use this table, the table will yield a higher life expectancy factor, and thus result in a lower RMD calculation, as compared to the result that would be achieved if the Uniform Lifetime Table were used by the same owner. Reg. ( Log Out / Note that the minimum is different for spouses and non-spouse beneficiaries. Which means that the remaining 80% are taking more than the required minimum, thus making any decreases in RMDs a moot point. Illustrate the application of this transition rule with an example involving an employee who died at age 80 in 2019 with a designated beneficiary (who was not the employee’s spouse) who was age 75 in the year of the employee’s death and who continues to be alive until at least 2022. For example, the 2020 RMD would be based on a Life Expectancy factor of 37.9 and 2021 would normally be 36.9 (one less than the prior year). View all posts by ellisassociatesinc. Under the old tables (in use through 2020), her life expectancy would have been only 27.9 years, triggering an RMD of $35,842. And growing that by a conservative growth rate of 6%/year amounts to a tax-deferral value of just $47/year of additional growth thanks to the reduced RMD. As noted earlier, the Proposed Regulation issued by the IRS on November 7, 2019 revise the three aforementioned life expectancy tables to account for today’s relatively longer life expectancies (compared to the current set of life expectancy tables published in 2002). These regulations affect participants, beneficiaries and plan administrators of these qualified retirement plans and other tax-favored employer-provided retirement arrangements, as well as owners, beneficiaries, trustees and custodians of IRAs and annuities. That’s the good news. For instance, a beneficiary who turns 34 years old in the year that they inherited an IRA must begin taking RMDs based on their life expectancy – as determined using the Single Life Expectancy Table – in the (subsequent after-death) year that they turn 35!