Required Minimum Distribution Impacted by Updated Life Expectancy

IRA ContributionsRequired minimum distributions (RMDs) are again making headlines!  Required minimum distributions are back after a brief hiatus for Covid-19 in 2020.  Two years into a pandemic, retirement looks different, and the new SECURE Act RMD rule and IRS life expectancy tables introduce additional complexity and confusion.  And now, RMD withdrawal amounts from retirement plans may change, thanks to new life expectancy metrics from the IRS, according to GoBankingRates.

In 2022, new life expectancy tables go into effect, which could complicate required minimum distributions from individual retirement accounts (IRAs), 401(k)s, and other types of qualified retirement plans.  Employers and participants will need to pay careful attention to how these changes impact withdrawals.

Before the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in late 2019, most people were required to take withdrawals from retirement accounts, such as IRAs, SEP IRAs, SIMPLE IRAs, or workplace retirement plans, when they reached age 70 1/2.  However, the legislation made it so those with birthdays of July 1, 2019 or later didn’t have to take RMDs until they reached age 72.  Roth IRA withdrawals aren’t required until the owner passes away.

Put another way, if an individual reached 70 1/2 before 2020, they had to take RMDs.  For those who turned or will turn 70 1/2 in 2020 or later, RMDs aren’t mandatory until they reach age 72.

At issue is that the new IRS life expectancy tables make the assumption that people will live longer.  According to CNBC, cited by GoBankingRates, “The amount you must withdraw each year is typically determined by dividing the previous year-end balance of each qualifying account by a ‘life expectancy factor’ as defined by the IRS.”  Since the agency’s tables assume a longer life span—by about one to two years – it may reduce the required withdrawal amount.

Here’s a real-world example, again provided by CNBC and cited by GoBankingRates:  “Under the new uniform life table, a 75-year-old would use 24.6 as their factor. If the account balance is $500,000, then dividing the amount by 24.6 results in an RMD of about $20,325.  Under the old table, the factor for a 75-year-old was 22.9, or $21,834 for a $500,000 account.”

In addition, retirement account owners could end up taking two distributions in a single year during their first year of RMDs.  That’s because the initial required withdrawal can be delayed until April 1 of the following year, meaning someone would have to take an RMD on their 72nd birthday, plus one in April.  This could push them into a higher income tax bracket, which may have tax consequences and possibly impact Medicare income eligibility requirements.

Individuals who delayed their 2021 RMD to take advantage of this rule need to make sure they are using the correct account balances and life expectancy tables.  A 2021 RMD would be based on the old life expectancy tables and the individual’s account balance as of Dec. 31, 2020.  However, the 2022 RMD would be based on the new IRS life expectancy tables and the individual’s account balance as of year-end 2021.

Employers will likely receive questions from retiree participants about the new required minimum distribution withdrawal requirements.  Plan sponsors and plan fiduciaries should be prepared to answer these questions in an informed way, or refer participants to the plan’s financial advisor.  The financial advisor will be prepared to deliver advice that’s appropriate for a participant’s specific situation.  Communication between plan sponsors and advisors is critical during this transition.


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