Updated Life Expectancy Tables Would Have Minimal Impact on Minimum Distributions

Matt Sommer, Senior Managing Director of the Retirement Strategy Group, says proposed changes to life expectancy tables would lower required minimum distributions from retirement accounts – but not by much.

Key Takeaways

  • This month, the IRS proposed regulations that would update life expectancy tables used to calculate required minimum distributions from retirement accounts, such as IRAs.
  • Although still in proposal form, these changes are widely expected to become finalized in 2020 with a 2021 effective date. Unfortunately, the new rules would only lower required minimum distributions by a small percentage annually.
  • While awaiting comments on the proposal, advisors are encouraged to ensure clients still satisfy their distribution for 2019 in a timely fashion.

In early November, the IRS released a proposal to update life expectancy tables used to calculate required minimum distributions (RMDs) from retirement accounts, such as IRAs and qualified plans. Since the tables were lasted updated in 2002, the average life expectancy for Americans has increased by approximately 2% (1.6 years). The motivation behind the proposed changes is to take longer life expectancies into account by reducing the annual minimum distribution. While they are only in proposal form at this stage, these changes are widely expected to become finalized in 2020 with a 2021 effective date.

New Rules, Minimal Tax Relief

Unfortunately, for account owners seeking to maximize the tax deferral benefit of their retirement accounts, the new RMD will only be marginally lower. For example, using the Uniform Life Expectancy table, account owners who take their first minimum distribution in the year they turn 70 will now have a life expectancy factor of 29.1, rather than the current 27.4. Assuming a prior year-end balance of $500,000, the new minimum distribution will be $17,182 rather than $18,248, or roughly 6% less. Of course, account owners may always take more than their required minimum distribution in any given year.

Making the Transition

If the proposal is finalized, the transition rules will be straightforward for most account owners. Individuals currently taking RMDs simply begin using the new tables in 2021. Individuals who turn 70½ in 2020 and decide to delay their first distribution until April 1, 2021, would use the old life expectancy tables to calculate the distribution for 2020 only and the new life expectancy tables for 2021 and beyond.

Transitions get more complicated for non-spouse beneficiaries taking distributions over their single life expectancy. These beneficiaries must calculate what their single life expectancy would have been when they inherited the IRA using the new tables and subtract 1 for each year that a minimum distribution would have been required.

While we await comments on the proposal, we would encourage advisors to ensure clients still satisfy their distribution for 2019 in a timely fashion. For clients who do not need their RMD, the charitable rollover remains a viable option. In addition, while RMDs themselves cannot be converted to a Roth IRA, these distributions can be used to help pay taxes if clients wish to convert all or a portion of their remaining traditional IRA balances.