2022 – Dealing with the New RMD Tables

Take-Away: The switch to the new RMD Tables beginning in 2022 will be simple for some individuals and a bit more challenging for others.

Background: The new required minimum distribution (RMD) tables become effective on January 1, 2022. Those tables provide a larger divisor (reflective of longer life expectancies) which in turn produce a smaller RMD. Thus, a retiree will be able to retain more retirement savings in their account to grow and be used in later years.

Example 1: Sarah, who was born on July 15, 1950, owns an IRA with $1.0 million on December 31, 2021. Sarah will turn age 72 in 2022. Under the old uniform lifetime table for a 72-year old individual, the life expectancy factor was 25.6. Thus, Sarah’s RMD taken in 2022 would be $39,063 [$1,000,000 divided by 26.6= $39,063.] Under the new uniform lifetime table, Sarah’s life expectancy is 27.4 years, which results in a smaller RMD of $36,496. Consequently, for Sarah, and anyone else who is taking an RMD from their retirement account, the switch to the new uniform lifetime table is straightforward- the just reference the new table. The ‘old’ tables [found at Regulation 1.401(a)(9)-9] will no longer apply to calculate RMDs starting in 2022.

SECURE Act: The SECURE Act, which increased an individual’s required beginning date (RBD) from age 70 ½ to age 72, which is now April 1 of the calendar year that follows the later of either (i) the calendar year in which the IRA owner attains age 72 or (ii) the calendar year in which the IRA owner or plan participant retires (excluding IRAs or qualified plan accounts for an employee who owns more than 5% of the company that maintains the qualified plan.) The increased age of 72 applies to those individuals who would have attained age 70 ½ after December 31, 2019. Therefore, the increased age of 72 is applicable to those individuals who were born on or after July 15, 1949.

Example 2: Following the Sarah example, if she were born just one year earlier, on July 15, 1949, she would reference the old uniform table for only one year, 2021. Sarah would be subject to RMDs when she turns age 72 in 2021. The RMD for the distribution calendar year 2021 can be taken by Sarah as late as April 1, 2022. The effective applicability date under the Regulations confirm that the new uniform tables do not apply to Sarah’s 2021 distribution calendar year, which is due April 1, 2022, but the new tables will apply to the 2022 distribution calendar year, which is due December 31, 2022.

Inherited Retirement Accounts: The process to calculate RMDs for those who have inherited an IRA can be a bit more complicated. Recall that under the SECURE Act and its implementing Regulations, only an eligible designated beneficiary  can continue to use the life expectancy method to calculate RMDs from an inherited retirement account. An eligible designated beneficiary is one of the following: (i) surviving spouse; (ii) child of the account owners who has not reached the age of majority; (iii) a disabled beneficiary per IRC 72(m)(7); (iv) a chronically ill beneficiary per IRC  7702B(c)(2); and (v) an individual who is not more than 10 years younger than the account owner. Thus, there are some minor complications computing the RMD under the new tables for an inherited IRA, or one which has an eligible designated beneficiary.

Grandfathered Designated Beneficiary Exception: There is also one very large other exception as well, where the life expectancy method to calculate RMDs applies after the SECURE Act. That is that if an individual account owner died before the effective date of the SECURE Act, meaning January 1, 2020. In this situation,  the designated beneficiary of the inherited IRA will be treated as an eligible designated beneficiary. In short, these designated beneficiaries are grandfathered. Therefore, if the IRA owner died prior to 2020, their grandfathered designated beneficiary would calculate their RMDs based on their own life expectancy. However, once that grandfathered designated beneficiary dies, their successor beneficiary will shift to the SECURE Act’s required 10-year payout rule.

Example 3: Don was born June 30, 1945. Don died on December 14, 2019 at age 74, prior to the SECURE Act’s eligible designated beneficiary rule became effective. On December 31, 2019, Don’s IRA was valued at $1,000,000. Don designated his daughter Diane as the sole beneficiary of his entire IRA. Diane attained age 33 in 2020. Diane’s life expectancy under the single life table was 50.5 years at the time of Don’s death. Therefore, Diane’s 2020 RMD would be $19,841 [$1,000,000 divided by 50.4= $19,841.] In 2021 and later, Diane’s life expectancy factors would be reduced by 1.0. Thus, in 2021, Diane’s divisor used to calculate her RMD would be 49.4. In 2022, but for the new tables, Diane’s divisor would be 48.4 years. Under the new single life expectancy table for a 33-year old beginning in 2022, Diane’s initial life expectancy factor will receive a one-time reset going from 50.4 to 52.5. Thus, for 2022, Diane will take the new initial divisor of 52.5 and reduce it by the two calendar years (2021 and 2022) that elapsed after 2020. Diane’s life expectancy factors will adjust as follows: 50.5 for 2022 ((52.5 less 2 years), for 2023 48.4 (52.5 less 3 years) etc.

Ghost Life Expectancy: If an IRA owner dies after his or her RBD and no beneficiary is designated for their IRA, or the beneficiary does not qualify as a designated beneficiary, the distribution period, i.e. the life expectancy factor, is over the IRA owner’s life expectancy using the single life table. This is often referred to as the ghost life expectancy period used to determine RMDs. This situation would arise, for example,  if the IRA owner designated a charity, his/her probate estate, or a trust that does not qualify as a see-through-trust as the named retirement account beneficiary. In this situation, the applicable distribution period is measured by the IRA owner’s birthday in the calendar year of his or her death. In subsequent years, the applicable distribution period is reduced by one (1) for each calendar year that has elapsed after the calendar year of the IRA owner’s death. [Regulation 1.401(a)(9)-5, Q&A-5(a)(2).] This situation which uses the deceased owner’s ghost life expectancy will require a one-time reset, starting in 2022.

Older Designated Beneficiary: If the IRA owner dies after his/her RBD, the designated beneficiary’s distribution period will be over the longer of: (i) the life expectancy of the designated beneficiary, or (ii) the life expectancy of the IRA owner.

Example 4: Following Example 3 when Don died, assume that Don left his IRA to his older brother, Dennis, and not to his daughter Diane,  Dennis could have used Don’s (his younger brother’s) life expectancy to calculate his (Dennis’) RMDs. This rule is in place to ensure that the designated beneficiary (Dennis) has a choice and is not worse off because there is no designated beneficiary under the ghost life expectancy rules. [Regulation 1.401(a)(9)-5, Q&A-5(a)(1).] Accordingly, if Dennis, Don’s older brother, was the designated beneficiary of the inherited IRA, Dennis will do a one-time reset in 2022 with regard to the RMD divisor, which will adjust subsequent year’s life expectancy factors that Dennis will use.

Substantially Equal Installments: An exception exists to the 10% early withdrawal penalty, i.e. withdrawals prior to age 59 ½. [IRC 72(t)920(A)(iv).] This permits a series of substantially equal periodic payments. The application of the final Regulations will not be treated as a modification to a series of substantially equal period payments which would otherwise trigger an acceleration of income or loss of qualified status for the IRA. However, it appears that the individual who is taking these substantially equal periodic payments from their retirement account will have to change the amortization/annuitization method that the individual was using. [Revenue Ruling 2002-62, Section 2.01(b).]

Conclusion: The advent of the updated life expectancy tables starting in 2022 will help individuals save more for their retirement and reduce their income taxes if they stick to taking RMDs from their retirement accounts. For account owners, there will be the one-time shift to the new uniform lifetime table. For those who are eligible designated beneficiaries of an inherited retirement account, there will be a one-time shift as well. For other beneficiaries of grandfathered inherited retirement accounts, a couple more calculations will be required to determine the divisor that must be used to calculate the inheritor’s RMD for 2022 and future years. This is not a big deal, but just something to keep in mind when calculating RMDs starting in 2022.