Distributions Decrease as Life Expectancy Expands

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The Internal Revenue Service’s proposed updates to their Uniform Lifetime Table are set to change  required minimum distributions starting in 2021. In 2018, the Trump administration signed an executive order directing the Treasury Department and IRS to revise their life expectancy and distribution tables. The purpose of this executive order was brought about due to increases in life expectancy among Americans and to ensure that IRA account holders will be able to stretch their benefits longer as seniors are expected to live longer. 

Several adjustments have been made to the Uniform Lifetime Table. The first notable change is the increase in distribution factors when taking a required minimum distribution from an IRA retirement plan. In the current table, individuals who reached age 70 ½ during the year of 2019 would have been required to use a divisor of 27.4 years (3.649%) for their distribution. According to the newly proposed table, an individual who reaches the same age would have to use a divisor of 29.1 years (3.436%) for the distribution – an increase of 1.7 years in life expectancy. As seen in the tables, the distribution factors have been increased across the board. The tables also reflect the increase in life expectancy by raising the final age from 115 years old to 120 years old. 

Current Lifetime Table for Required Minimum Distribution

AGEDISTRIBUTION PERIODAGEDISTRIBUTION PERIODAGEDISTRIBUTION PERIODAGEDISTRIBUTION PERIOD
7027.48217.1949.11064.2
7126.58316.3958.61073.9
7225.68415.5968.11083.7
7324.78514.8977.61093.4
7423.88614.1987.11103.1
7522.98713.4996.71112.9
7622.08812.71006.31122.6
7721.28912.01015.91132.4
7820.39011.41025.51142.1
7919.59110.81035.2115 and over1.9
8018.79210.21044.9

8117.9939.61054.5

Source: IRS Required Minimum Distribution Worksheet

Proposed Lifetime Table for Required Minimum Distribution

AGEDISTRIBUTION PERIODAGEDISTRIBUTION PERIODAGEDISTRIBUTION PERIOD
7029.18714.41044.9
7128.28813.61054.6
7227.38912.91064.3
7326.49012.11074.1
7425.59111.41083.9
7524.69210.81093.7
7623.79310.11103.5
7722.8949.51113.4
7821.9958.91123.2
7921.0968.31133.1
8020.2977.81143.0
8119.3987.31152.9
8218.4996.81162.8
8317.61006.41172.7
8416.81015.91182.5
8516.01025.61192.3
8615.21035.2120 and Over2.0
Source: Federal Register 

To put these percentages into numbers, current regulations would mandate that if a 70 ½ year old has $150,000 in their retirement account, their first RMD would amount to $5,474.45. In comparison, if the proposed changes go into effect, a similar individual at age 70 ½ would have to take a minimum of $5,154.64. For the retiree, this means they will take $319.81 less in their first RMD if the proposed changes go into effect. This is a significant benefit for investors who only need to take the minimum distribution, or those who want to ensure that they maintain their benefits throughout retirement. 

The IRS explains that to apply the new table, an individual who reaches the age of 70 ½ in 2020 would be required to use the current table for their 2020 distribution, which would be due by April 1st, 2021. For their 2021 distribution and all those that follow, they would be required to use the updated table. In tandem with the proposed changes to the Uniform Lifetime Table, the IRS also made proposals to update the Single Life Expectancy Table. 

Beneficiaries of individual retirement accounts will also see changes to their distribution chart if the new table goes into effect. The changes made to the Single Life Expectancy Table and distribution periods were increased similarly to those in the Uniform Lifetime Table. The IRS proposal states that beneficiaries will have their Single Life Expectancy Table distributions reset when making their 2021 distribution. Therefore, when a beneficiary makes a 2020 distribution they will do so using the current life expectancy distribution rate, minus one year. Following their 2020 distribution, the beneficiary will be reset and the new table will be administered. 

Current Single Life Expectancy TableProposed Single Life Expectancy Table
AGELife Expectancy FactorAGELife Expectancy FactorAGELife Expectancy FactorAGELife Expectancy FactorAGELife Expectancy FactorAGELife Expectancy Factor
082.44142.7829.1084.54144.7829.9
181.64241.7838.6183.74243.8839.2
280.64340.7848.1282.74342.8848.6
379.74439.8857.6381.74441.8858.1
478.74538.8867.1480.84540.9867.5
577.74637.9876.7579.84639.9877.0
676.74737.0886.3678.84739.0886.6
775.84836.0895.9777.84838.0896.1
874.84935.1905.5876.84937.1905.7
973.85034.2915.2975.85036.1915.3
1072.85133.3924.91074.85135.2924.9
1171.85232.3934.61173.85234.3934.6
1270.85331.4944.31272.85333.3944.2
1369.95430.5954.11371.95432.4953.9
1468.95529.6963.81470.95531.5963.7
1567.95628.7973.61569.95630.6973.4
1666.95727.9983.41668.95729.7983.2
1766.05827.0993.11767.95828.8993.0
1865.05926.11002.91866.95927.91002.8
1964.06025.21012.71966.06027.11012.6
2063.06124.41022.52065.06126.21022.5
2162.16223.51032.32164.06225.31032.3
2261.16322.71042.12263.06324.51042.2
2360.16421.81051.92362.06423.61052.1
2459.16521.01061.72461.16522.81062.1
2558.26620.21071.52560.16622.01072.1
2657.26719.41081.42659.16721.21082.0
2756.26818.61091.22758.26820.41092.0
2855.36917.81101.12857.26919.51102.0
2954.37017.0111+1.02956.27018.71112.0
3053.37116.3

3055.37117.91122.0
3152.47215.5

3154.37217.11131.9
3251.47314.8

3253.47316.31141.9
3350.47414.1

3351.47415.61151.8
3449.47513.4

3451.47514.81161.8
3548.57612.7

3550.57614.01171.6
3647.57712.1

3649.57713.31181.4
3746.57811.4

3748.67812.61191.1
3845.67910.8

3847.67911.9120+1.0
3944.68010.2

3946.68011.2

4043.6819.7

4045.78110.5

Source: Fidelity Investments Final MRD Regulations: Life Expectancy TableSource: Federal Register

For beneficiaries, when the new rules go into effect in 2021 for the Single Life Expectancy Table, they will have to recalculate their required minimum distributions. If someone began taking RMDs at age 50 in 2010 the distribution factor they would use in 2020 would be 24.2. When the new rules go into effect in 2021 the beneficiary will have to find the distribution factor for age 50 on the new table, and subtract one for each year that has passed until they reach age 61. Under the old table the distribution factor would be 23.2, however after recalculating using the new table, the distribution factor is 25.1. 

YearDeaths Before 2021Deaths After 2020
20105034.250 36.1
20115133.25135.1
20125232.25234.1
20135331.25333.1
20145430.25432.1
20155529.25531.1
20165628.25630.1
20175727.25729.1
20185826.25828.1
20195925.25927.1
20206024.26026.1
20216123.26125.1

Distributions for benefactors are calculated by first determining whether or not the beneficiaries life span is longer than the deceased account holder using the Single Life Expectancy Table. In this example, the benefactor was age 50 when they started taking RMDs in 2010. Therefore, the benefactor would have used the old distribution table through age 60, or the year 2020. Once the calendar year switched to 2021 and the benefactor turned 61, they would have to calculate what their distributions would have been at age 50 under the new table and subtract one for each year until they reached age 61. Rather than being grandfathered into the new system, all beneficiaries taking RMDs using the Single Life Expectancy Table will have to switch to the rules of the new tables effective January 2021. 

Overall, the proposed changes to both the Uniform Lifetime Table and the Single Life Expectancy Table will ease the burden of taking required minimum distributions, especially in the first couple of years. With that being said, the impact of the tables not being grandfathered with the old rules will be a nightmare for individuals taking RMDs and the financial institutions responsible for calculating these distributions. Specifically for those using the Single Life Expectancy Table, the retroactive switch beginning in 2021 causes a significant amount of confusion for anyone who isn’t aware of these changes. Individuals who are currently taking RMDs or close to taking them should meet with an adviser to discuss the specific details changing in their accounts. It should also be noted that the proposed IRS changes may be subject to further review with the passing of the SECURE Act in 2019.

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