Take-Away: The IRS just published proposed Regulations to update the Life Expectancy and Distribution Tables that are used to calculate an individual’s required minimum distribution (RMD) from his or her retirement plan account. Assuming these proposed Regulations are adopted, they will apply to calculate RMDs beginning on January 1, 2021, (coincidently) the same time the proposed increase in the required beginning date (RBD) under the SECURE Act, which would increase the RBD from age 70 ½ to age 72.

Background: The Tax Code mandates required minimum distributions (RMDs) from IRAs [IRC 408(a)(b)] and qualified plan accounts [IRC 401(a)(9).] Life expectancies are used to calculate an individual’s RMD. The IRS created life expectancy tables (or divisors), based on an individual’s life expectancy, to determine that individual’s RMD for the calendar year, once the individual is age 70 ½ . Unfortunately, the last time the IRS updated its tables (or divisors) was 2002. Executive Order 13847 required the IRS to update its RMD tables to reflect an increase in the longevity of Americans. The IRS responded to that directive with proposed updated life expectancy tables, and corresponding divisors, that are used to calculate RMDs.

Public Comments: The public comment period with regard to the proposed RMD Regulations ends on January 7, 2020.

Effective Date: If the proposed Regulations are adopted as Final Regulations, the new Life Expectancy/Distribution Tables used to calculate an individual’s RMD will become effective on January 1, 2021.

Source: federalregister.gov/d/2019-24065

Examples: The proposed Regulations provide many examples to demonstrate how the updated divisors would impact the calculation of RMDs. Stating the obvious, the larger the divisor of the retirement account balance, the smaller the RMD that the individual will have to report as taxable income for the calendar year in which the RMD is taken.

  1. Mark is age 70 ½  years. Under the current IRS Uniform Table (two lives used, one of which presumed to be 10 years younger) Mark’s RMD divisor is 27.4  (a number I now know from memory having just passed my 70th birthday!) Under the proposed Regulations, Mark’s new RMD divisor would become 29.1– an increase of 1.7 in the applicable
  2. Karen is age 75 years. Under the current IRS Single Life Table, Karen’s RMD divisor is 13.4 years. Under the proposed Regulations, Karen’s RMD divisor would become 14 — an increase of 1.4 in the applicable divisor.
  3. Bill is age 70 ½  years. Bill owns a $250,000 IRA. Bill’s RMD under the current IRS Table is $9,124, or 3.65% of his IRA account balance. Under the proposed Regulations, Bill’s RMD would be $8,591, or 3.44% of his IRA account balance. The decrease of $533.00 in Bill’s RMD using the new divisor reflects the preservation of 0.21% of Bill’s IRA assets.
  4. Edna is age 90 years. Edna owns a $250,000 IRA. Edna’s RMD under the current IRS Table is $21,930, or 8.77% of her IRA account balance. Under the proposed Regulations, Edna’s RMD would be $20,661, or 8.26% of her IRA account balance. The decrease of $1,269.00 in Edna’s RMD using the new divisor reflects the preservation of 0.51% of Edna’s IRA assets.

Conclusion: These proposed Regulations promise individuals reduced taxable income through smaller RMDs, which presumably is a positive outcome. There are many examples provided in the multi-page proposed Regulations that address several different situations with regard to how RMDs are calculated under various situations. Consequently, the examples provided above are intended to only give you a sense of the impact that the updated divisors will have on calculating an individual’s RMD. I strongly suspect that the proposed Regulations will become Final Regulations, so plan on using the new divisors beginning 2021.