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George F. Bearup, J.D. Senior Legal Trust Advisor

1-Dec-20

Life Expectancy Table Changes Postponed

Take-Away: The IRS’s life expectancy Tables used to establish an individual’s required minimum distributions (RMDs) were scheduled to be updated and become effective on January 1, 2021. Those changes just got delayed one year. Those updated Tables, reflecting longer life expectancies, would have produced smaller RMDs. Now, those smaller RMDs of taxable income are delayed another year.

Background: Last year the IRS revised its life expectancy tables, in effect since 2002, to reflect longer life expectancies. A year ago (November 8, 2019) the IRS issued proposed Regulations that were intended to become effective on January 1, 2021. However, because the Final Regulations were issued so late in 2020, on November 6, 2020,  the IRS has delayed the effective date of those new, longer, life expectancy Tables to 2022 in order to allow IRA custodians and qualified plan administrators additional time to upgrade their software systems used to calculate RMDs. [In fairness to the IRS, it had a lot on its plate in 2020.] The effective date to use the updated IRS Tables is now January 1, 2022.

IRS Life Expectancy Tables: Three IRS life expectancy tables are affected by this one-year delay, all of which have an impact on calculating RMDs:

  • Uniform Lifetime Table: This Table is used to calculate lifetime RMDs for IRA owners and plan participants;
  • Joint (and Last Survivor) Life Expectancy Table: This Table is used instead of the Uniform Lifetime Table when a spouse is the sole IRA or qualified plan beneficiary who is more than 10 years younger than the deceased IRA owner or plan participant;
  • Single Life Expectancy Table: After the SECURE Act’s 10-year distribution rule, this Table is only used to calculate post-death RMDs for eligible designated beneficiariese. a surviving spouse, a minor child of the deceased account owner, a chronically ill or disabled beneficiary, or a beneficiary who is no more than 10 years younger than the deceased account owner. This Table is also used if the IRA owner dies after his/her required beginning date (RBD), which is April 1 of the year following the year in which the IRA owner attains age 72, without naming a living beneficiary of their retirement account.
  • Substantially Equal Periodic Payments: These Tables will also be used, starting January 1, 2022, for substantially equal periodic payments from an IRA permitted under IRC 72(t).

New Tables: The Final Regulations (99 pages in length) that identify these new life expectancy Tables and factors (or divisors) are found at: public-inspection.federalregister.gov/2020-24723.pfd.

Longer Life Expectancies: The effect of the changed Tables will be to reduce the amount of the RMD generally which, in turn, will allow the individual to retain larger amounts in their IRA or retirement account to reflect the actuarial probability that they will live longer.

  • Example: Under the ‘old’ [still followed for 2021] Table, a 72-year old IRA owner under the Uniform Lifetime Table has a life expectancy of 25.6 years. [Treasury Regulation 1.401(a)(9)-9.] Under the ‘new’ Uniform Lifetime Table, effective January 1, 2022, that same 72-year old IRA owner will have a life expectancy of 27.4 years which is used to calculate his or her RMD. If the 72 year old retiree has $1.0 million in their IRA and must now begin to take RMDs, under the ‘old’ Table, their first year RMD will be $39,060. Under the ‘new’ Table their first year RMD will be $36,396, or a $2,664 difference.
  • Example: A surviving spouse is age 75 years. She is the sole beneficiary of her deceased husband’s IRA. The widow uses the Single Life Table to calculate her RMDs. Under the ‘old’ Table (still followed for 2021) the widow’s RMD will be calculated using a life expectancy of 13.4 years. Under the ‘new’ Single Life Table, effective January 1, 2022, the widow will use a life expectancy of 14.8 years to calculate her RMDs. If the widow inherited a $1.0 million IRA from her late husband, under the ‘old’ Table, her RMD will be $74,627; under the ‘new’ Table, her RMD will be $67,568, or a $7,059 difference.

Conclusion: By using the ‘old’ life expectancy Tables, those who take RMDs in 2021 will take a larger distribution of taxable income than if the ‘new’ Tables were permitted to be used. At a time when RMDs are suspended in response to the pandemic with the goal of permitting retirement accounts to grow to recoup the losses they sustained from the  economy’s ‘shut down’, it seems a bit surprising that the IRS would force retirees to take more taxable income from their retirement account in 2021. This may not be an issue if the ultimate Congressional decision is to suspend RMDs for 2021 as the economy continues to struggle to recover from this winter’s COVID-19 surge.