Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
For
those on the IRS IRA Required Minimum Distribution and for those who soon will
be, 2022 has some rule changes. Two
ariticles below regarding “start age” and “table changes” for withdrawal
amount.
This 1st article serves as
a review of the changes brought about by the Secure Act most prominently the
start age for RMD’s from age 70 ½ to age 72.
How Required Minimum Distribution (RMD) Changes Under The SECURE
Act Impact Retirement Accounts
EXECUTIVE SUMMARY
Last month, the Setting Every
Community Up For Retirement Enhancement (SECURE) Act was passed into law,
creating the most substantial updates to the laws governing retirement accounts
since the Pension Protection Act in 2006. One notable change resulting from the
SECURE Act will be the increase in age at which Required Minimum Distributions
(RMDs) must begin. Prior to the SECURE Act, individuals with IRA accounts or
qualified employer-sponsored retirement plans were required to take RMDs
beginning in the year in which they turned 70 ½ with a deadline (for the
first RMD only) of April 1 of the following year.
Beginning in 2020, however, the
new age at which RMDs must start is age 72 (also with a deadline of April 1 of
the following year). Notably, RMDs for individuals who turned 70 1/2 in 2019
are not delayed, and
instead, such individuals must continue to take their RMDs under the same rules
prior to passage of the SECURE Act. Despite the delay in the starting age for
RMDs, though, Qualified Charitable Distributions (QCDs) from IRAs will not be
affected by the SECURE Act; accordingly, QCDs may still be taken from IRAs as
early as age 70 1/2.
While the same life expectancy
factors will continue to be used with no change under the SECURE Act, the IRS
has recently (and separately) proposed to update the current life expectancy
tables to adjust for longer expected lifespans. The IRS proposal has not yet
been finalized, but is largely expected to be effective for RMDs calculated for
2021, and beyond.
Interestingly, for those who
were born in the first half of the year (i.e., between January 1st and June 30th), the SECURE Act provides
a longer delay of the first RMD than for those individuals born on July 1st or later. Those with
birthdates in the first six months of the year reach age 70 and 70 1/2 in the same
year (and thus their first RMD is not required until two years later, when they
reach age 72), whereas those whose birthdates are in the last six months of the
year reach age 70 1/2 in the year they reach age 71 (and thus, their first RMD
is ‘only’ delayed until the following year, when they turn 72).
The majority of retirees will
not be impacted by the delayed RMD starting age (since most people aren’t able
to afford to wait until the age when RMDs must begin), but for those that are,
strategically timed Roth Conversions can be an effective tool to accelerate
income in a tax-efficient manner, leveraging the additional time that IRA
owners are afforded before their RMDs start, thus increasing their annual
income.
Ultimately, the key point is that, while the change in RMD
starting age won’t impact a large swath of the population, financial advisors
are likely to have clients who will be affected by the
change and who may benefit from the additional time in which Roth Conversions
can be executed. Furthermore, advisors should also review their technology
systems and planning processes, specifically for clients born after June 30,
1949 and who will be affected by the new RMD rules.
AUTHOR: JEFFREY LEVINE, CPA/PFS, CFP®, AIF, CWS®, MSA
TEAM KITCES
Jeffrey Levine, CPA/PFS, CFP, AIF, CWS, MSA is the Lead
Financial Planning Nerd for Kitces.com, a leading online
resource for financial planning professionals, and also serves as the Chief
Planning Officer for Buckingham Strategic Wealth. In 2020, Jeffrey was
named to Investment Advisor Magazine’s IA25, as one of the top 25 voices to
turn to during uncertain times. Also in 2020, Jeffrey was named by Financial
Advisor Magazine as a Young Advisor to Watch. Jeffrey is a recipient of the
Standing Ovation award, presented by the AICPA Financial Planning Division for
“exemplary professional achievement in personal financial planning services.”
He was also named to the 2017 class of 40 Under 40 by InvestmentNews, which
recognizes “accomplishment, contribution to the financial advice industry,
leadership and promise for the future.” Jeffrey is the Creator and Program
Leader for Savvy IRA Planning®, as well as the Co-Creator and Co-Program
Leader for Savvy Tax Planning®, both offered
through Horsesmouth, LLC.
He is a regular contributor to Forbes.com, as well as numerous industry
publications, and is commonly sought after by journalists for his insights. You
can follow Jeff on Twitter @CPAPlanner.
Read more of Jeff’s
articles here.
On December 20, 2019, President
Donald Trump signed the Setting Every Community Up For Retirement
Enhancement (SECURE) Act into law as part of the broader Further Consolidated
Appropriations Act of 2020 (Note: the year 2020 is
used because it is for the 2020 fiscal year). By
most accounts, the SECURE Act will have the largest direct impact on retirement accounts since the passage of the Pension
Protection Act in 2006.
While for financial advisors,
the SECURE Act’s repeal of the “Stretch” provision for inherited retirement
accounts (at least for most non-spouse beneficiaries) is likely the biggest
headline, other changes will also have a significant impact on planning for
years to come.
One such change is the ‘subtle’
increase in the age at which Required Minimum Distributions (RMDs) must begin
during a retirement account owner’s lifetime.
Lifetime Required Minimum Distributions (RMDs) To Begin At Age 72 Under
SECURE Act
Section 114 of the SECURE Act increases the age at which an IRA owner, or participant in
an employer-sponsored retirement plan, must generally begin taking RMDs, from
the year in which they turn 70 ½, to the year in which they reach age 72,
instead. Participants in 401(k), 403(b), and similar (non-IRA-based)
employer-sponsored retirement plans will continue to be able to delay RMDs to a
later age, provided they are still working and
meet the requirements of IRC Section 401(a)(9)(c)(ii)(I).
Accordingly, the Required
Beginning Date for IRA owners and most plan participants is
changed from April 1st of the year following the year in which they reach age 70
½, to April 1st of the year following the year in which they reach age 72.
Mirroring the option available
under current rules, individuals will be able to timely distribute their first
RMD at any time during the year in which they reach age 72, or in the following
year, up until as late as April 1st. However, similar to current rules, if an individual chooses to
take their age-72 RMD between January 1st and April 1st of the following year, they will have to take both that RMD (the age-72-RMD), and a second RMD (the age-73-RMD) by the end of the year
(potentially pushing them into a higher income bracket and/or increasing other
income-related costs, such as the Medicare Income Related Monthly Adjustment Amount (IRMAA).
RMDS FOR INDIVIDUALS WHO REACHED AGE 70 ½ IN 2019 WON’T
CHANGE
Although the SECURE Act delays
the age at which RMDs must begin for many individuals approaching the age of 70 ½, it does not offer any relief to those who turned 70 ½ in 2019. Such
individuals will continue to have a Required Beginning Date of April 1, 2020,
and must continue to take RMDs in the same manner as before the SECURE Act.
More specifically, Section 114(d)
of the SECURE Act states:
EFFECTIVE DATE.—The amendments
made by this section shall apply to distributions required to be made after
December 31, 2019, with respect to individuals who attain age 70 ½ after such date. [Emphasis added]
Thus, anyone who reached the
onset of RMDs in 2019 (or a prior year, for those who are already well into
their 70s and beyond) will simply have to continue their current RMD schedule.
Even someone who is only turning age 71 in 2020 (having turned age 70 ½ in the
second half of 2019) cannot wait until age 72 to begin RMDs, because they
already triggered the onset of RMDs in 2019 by reaching that age 70 ½ threshold
in 2019. Again, only those who were younger than age 70 ½ at the end of 2019
(i.e., those born after June 30th of 1949) are eligible for the new age-72 RMD threshold.
(Nerd Note: As a result
of the SECURE Act's changes to RMDs for individuals turning 70 ½ after 2019,
together with the requirement that those turning 70 ½ in 2019 continue to take RMDs like 'normal', there will
be no
IRA owners who have to take their first RMD for the year 2020. Similarly, no IRA owners will have a Required Beginning Date
of April 1, 2021!)
SECURE ACT OFFERS LONGER RMD DELAYS FOR THOSE WITH
FIRST-HALF-OF-THE-YEAR BIRTHDAYS
For those who choose to wait to
take distributions from their IRAs or other retirement accounts until they
reach the age when RMDs must start, the changes made by the SECURE Act to
lifetime RMDs actually have twice the impact for those born in the first half
of the year, as compared to those born in the second half of the year!
More specifically, those who
are born from January 1st through June 30th will reach their 70th birthday in the same year that they reach age 70 ½. Thus,
they gain two more years of RMD deferral
by virtue of the SECURE Act’s changes.
Example #1: Sulley is a
Traditional IRA owner who was born on June 3, 1950. As such, he will turn 70 ½
on December 3, 2020. Prior to the changes made by the SECURE Act, Sulley would
have needed to begin taking RMDs in 2020 (or as late as April 1st of 2021).
In light of the SECURE Act’s
changes, however, Sulley will not have to begin taking distributions until the
year he reaches 72, which is in 2022, with his first RMD due as late as April 1st of 2023. Thus, his
RMDs are delayed two calendar years as compared to the current rules.
By contrast, individuals who
are born from July 1st through December 31st have their half-birthday the year after they turn 70, which means they actually turn 71 in the year in
which they reach age 70 ½. Thus, such individuals will only see one additional
year in which they are not obligated to take an RMD.
Example #2: Mike is a
Traditional IRA owner who was born on July 10, 1950. As such, Mike will turn 70
½ on March 10, 2021. Therefore, prior to the changes made by the SECURE Act,
Mike would have needed to begin taking RMDs in 2021 (or as late as April 1st of 2022).
Now, however, as a result of
the SECURE Act’s change, Mike won’t have to begin taking RMDs until the year he
reaches 72, which is 2022 (or as late as April 1st of 2023 for his
first RMD). As such, the SECURE Act buys him only one additional year of no
RMDs.
RMD LIFE EXPECTANCY FACTORS FOR EACH AGE WON’T CHANGE (AT
LEAST UNDER SECURE ACT)
One of the most common
questions regarding the change to the starting age for RMDs has been “Does this
change the life expectancy factors used to calculate those RMDs at all?” The
answer, under the SECURE Act, is “No.”
Rather, the current life
expectancy factors that apply for various ages will continue to apply when
retirement account owners reach those ages. The factors are not ‘pushed back’. Instead, retirement account owners just
won’t have to use the factors for an age-70 or age-71 individual anymore, and
will begin at age 72 instead!
Example 3: Randall is a
single IRA owner who is turning 70 ½ on August 21, 2020. Absent the changes
made by the SECURE Act, he would have begun taking RMDs for the year 2020,
using the Uniform Lifetime Table, which, for a 70-year-old, indicates a factor
of 27.4.
As a result of the SECURE Act’s
changes, though, Randall will not have to begin taking RMDs until 2022, when he
will reach age 72. Therefore, Randall’s first RMD will still be calculated
using the Uniform Lifetime Table factor for a 72-year-old (currently 25.6).
Notably, though, a separate IRS proposal from earlier this in 2019 will potentially change the life expectancy tables to be used
for all RMDs in the coming years. And while
the Proposed Regulations have yet to be made official, they are widely expected
to be finalized sometime in the first half of 2020, to be effective for RMDs
beginning in 2021. As such, RMDs that occur in 2021 and later may actually have
a different life expectancy factor than under current law… but not as a result
of the SECURE Act. Consequently, the SECURE Act impact remains the same – that
the life expectancy tables simply won’t apply at ages 70 and 71 and instead
will begin at age 72 – but by the time the first SECURE Act new-age RMDs do kick in at age 72 in 2022, they will likely do so with new
tables.
As a result of these changes,
though, there’s a funny coincidence that is likely to play itself out as a
result of the combination of the SECURE Act and the newly Proposed Regulations
to change the RMD life expectancy tables. Under the current Uniform Lifetime
Table, the factor for a 70-year-old (which has, admittedly, only been used by
half of retirement account owners – because the other half have turned 71 in
the year that they first reach age 70 ½) is 27.4. Meanwhile, the factor for a
72-year-old under the ‘new’ Uniform Lifetime Table contained in the
aforementioned Proposed Regulations is a nearly identical 27.3.
As a result, assuming the
Proposed Regulations are finalized and effective for 2021, the future
age-72-first-RMD for individuals in 2022 under the SECURE Act is going to be
almost an identical percentage of their IRA as would have been for those born
in the first half of the year when turning age 70 ½ under the old rules!
SECURE ACT CHANGE IN RMD STARTING DATE DOESN’T IMPACT
STARTING AGE FOR QUALIFIED CHARITABLE DISTRIBUTIONS (QCDS)
Although the SECURE Act changes
the age at which RMDs must begin (for those turning 70 ½ after 2019), the law
made no
change to the age at which Qualified Charitable
Distributions (QCDs) may begin (which is also
age 70 ½). So, even though IRA owners (QCDs can only be made from IRAs) will not have to start taking RMDs from their IRAs until
they reach age 72, they will still be able to make QCDs
from those accounts once they reach the actual age of
70 ½ (notably, not just the year in which
they reach age 70 ½ like RMDs; for QCDs, the individual must actually reach age 70 ½).
Such pre-RMD QCDs are entirely
voluntary and will not reduce or otherwise impact future RMD amounts (other
than that the IRA balance will be reduced by the amount of the QCD when
calculating those future RMDs).
However, for those individuals
who are charitably inclined and want to give to charity anyway, the QCD can (still) be an attractive way of doing so, especially if giving cash (or even appreciated securities) won’t be
deductible because total itemized contributions do not exceed the taxpayer’s
standard deduction.
Planning With The New RMD Starting Age
While any delay in the ‘forced’
distribution of funds from IRAs and other retirement accounts will, no doubt,
be welcome news for many individuals - particularly the clients of financial
advisors who tend to have sizable retirement account balances – the reality is
that the majority of retirement owners will see little to no benefit from this
change.
As it’s important to remember
that an RMD is a required minimum distribution, it
doesn’t prevent people from taking more than the required amount, or from
taking distributions from their retirement accounts before they are mandated to
do so. Which in practice is what many people do, simply because they need the money (for retirement!).
To that end, earlier this
year, as part of Proposed Regulations to update the Life Expectancy
Tables that individuals use to calculate RMDs, the IRS indicated that according
to its own numbers, only about 20% of people take just the required minimum amount. And if someone is
already taking more than the minimum, they’ll likely continue to do so
regardless of whether the RMD age is age 70 ½ or age 72. It’s unlikely that
they’ll suddenly find enough ‘other’ money to be able to delay taking
distributions.
Thus, the SECURE Act’s change
to the RMD age is really only likely to benefit the roughly one-fifth of
retirement account owners who, according to the IRS, can potentially
afford not to be taking distributions
from their accounts. Which, admittedly, may disproportionately be the clients
that financial advisors tend to work with!
For such individuals, pushing
back the RMD starting age “from 70 ½, all the way to 72” (note dripping
sarcasm) may seem like only a minor change, but whenever Congress cracks open a
planning window, it’s best to make the most of it, no matter how small that
crack may be.
(Nerd Note: In the event an unwanted (i.e., not-actually-required)
distribution occurs prior to an advisor being able to connect with a client to
let them know about the new RMD age, particularly for those whose RMDs would
have begun in 2021, advisors can check to see if the distribution is eligible for rollover
within the 60-day window as an indirect rollover.)
ADDITIONAL PARTIAL ROTH CONVERSIONS CAN BE MADE
DURING THE ‘BONUS’ RMD GAP YEARS
Traditionally, so-called “Gap
Years” have been generally understood to represent the years between when an
individual retired and when they began receiving Social Security benefits and
taking RMDs. For those who could afford to delay IRAs and Social Security until
required to do so (or in the case of Social Security benefits, until there was
no longer good reason to delay benefits), Gap Years would end when income from
both Social Security and RMDs began to flow in – often at around the same time,
as Social Security would begin at age 70, and RMDs in the year an individual
reached 70 ½.
These Gap Years can be some of
the lowest taxable income years of an individual’s adult life, and as such,
they often make prime years for accelerating income that would otherwise be
taxable in a future, higher-income year (such as after Social Security benefits
and RMDs have kicked in). More often than not, this income acceleration is best accomplished via partial Roth
IRA conversions, both because it is easy to
generate the income (it’s essentially a matter of paperwork, or in some cases,
just the clicking of a few buttons), and because it also provides further tax
benefits in the form of future tax-free distributions of earnings (provided
the qualified distribution rules are met).
The SECURE Act’s changes will
potentially give an additional year or two where Social Security benefits may
begin but before the onset of RMDs stacked on top that can substantially
increase income (for those who did not already need their
retirement account distributions), in essence creating one or two “Semi-Gap”
Years where it may still be appealing to do a partial Roth conversion on top of Social Security benefits to fill the void of
not-yet-required-to-be-taken RMDs.
However, even with this
benefit, such individuals will generally find that these years do not allow for
the same volume of tax-efficient Roth IRA conversions as earlier years Gap
Years, because the receipt of Social Security income will at least partially
crowd out the lower tax brackets (and phasing in the taxation of Social
Security benefits, also known as the ‘tax torpedo’, can be especially
tax-unfavorable). As a result, continued, but
slightly lower, partial Roth IRA conversions may still make sense during these
new ‘bonus’ years in which RMDs are no longer required (but will need to be
evaluated on a case-by-case basis to coordinate with the onset of Social
Security benefits).
SECURE ACT PROVIDES OPPORTUNITIES TO REVIEW 2020 RETIREMENT
DISTRIBUTION PLANS
Chances are that long before
the SECURE Act was passed, individuals turning 70 ½ in 2020 had established
their 2020 income ‘game plan’ with the idea that some or all of their living
expenses would be covered by distributions that they would be required to begin
taking from their retirement accounts.
Now, however, such individuals
no longer have to take those same distributions from their IRAs and other
retirement accounts, as they will be permitted to delay these distributions with
a new RMD age of 72 (delaying their first required distributions under 2021 or
2022 depending on when their birthday falls). Thus, a re-evaluation of 2020
cash flow and retirement distribution sources is advisable.
Perhaps, for instance, an
individual has ample taxable dollars in a bank or brokerage account that would
make sense to spend first. This might allow an individual to keep income low
enough to avoid spikes in their marginal tax rate as Social Security income
taxability is phased in. Alternatively, switching funding for 2020 spending
from pre-tax retirement dollars to taxable dollars may allow even more dollars
to be converted to a Roth IRA at favorable tax rates, as discussed above (for
those not being adversely impacted by the taxability phase-in of Social
Security benefits).
Bear in mind that in many
situations, individuals turning 70 ½ in 2020 may have already completed
distribution paperwork or other similar requests, that will trigger
early-in-2020 distributions from their IRA or other pre-tax retirement account.
Such individuals should be prioritized for communication by advisors to avoid
now-unwanted (or unnecessary) distributions from occurring.
UPDATE TECHNOLOGY SYSTEM SETTINGS AND OPERATIONAL PROCESSES
Many advisors use various kinds
of technology to help them plan for and communicate with clients. And in many
cases, the workflows and other systematized processes advisors employ are
self-built, or at the very least, highly customized by the advisors who benefit
from them.
It’s likely that many of these
systems have some sort of logic built around RMDs beginning at age 70 ½, such
as:
·
Letters automatically generated to send to clients about their
first RMD year;
·
70 ½ ‘birthday’ reminders to send presents, cards, letters,
etc.; and
·
Inclusion of such individuals on year-end RMD ‘double-check’
lists.
Advisors should carefully
review systems and processes to see what items may need to be updated in order
to keep them in compliance with the SECURE Act’s changes.
A good starting point would be
to segment clients based on their birthday – where those born prior to July 1st of 1949 are subject to the ‘current’/old rules (where RMDs
begin or already began by age 70 ½), while those born after June 30th of 1949 wouldn’t have been turning age 70 ½ until 2020 or
later and consequently will all be eligible for the new age-72 RMD rules.
Changes To The RMD Starting Age Have Some ‘Side Effects’ For Account
Beneficiaries
Clearly, the most significant
aspect of the SECURE Act’s change in the age at which RMDs must begin is the
direct impact it has on RMDs. But lifetime RMDs are not the only things impacted by this change. Notably, the change
impacts Non-Designated Beneficiaries after the death of the retirement account
owner, as well as spousal beneficiaries who choose to remain beneficiaries of
an inherited retirement account.
REQUIRED MINIMUM DISTRIBUTION RULES FOR NON-DESIGNATED
BENEFICIARIES
Under IRC Section 401(a)(9)(A), when a
retirement account owner dies prior to their RMD Required Beginning Date and
has named a Non-Designated Beneficiary (e.g., charities, estates,
non-see-through trusts), that Non-Designated Beneficiary is required to
distribute all the assets in the inherited retirement account within 5 years.
Conversely, IRC Section 401(a)(9)(B) provides that when the owner dies on or after their
Required Beginning Date with a Non-Designated Beneficiary, annual minimum
distributions are calculated using the decedent’s remaining single life
expectancy (had they lived).
The SECURE Act made no direct
change(s) to these rules (as the new 10-Year Rule does not apply to Non-Designated Beneficiaries). However, as a result of the change in the age at which RMDs
begin, an IRA owner’s Required Beginning Date is now pushed back to April 1, of
the year following the year that they turn 72 (the same age applies to plan
participants unless an exception, such as the “Still Working Exception” is applicable).
Thus, for Non-Designated Beneficiaries, the 5-Year Rule will still apply if
death occurs at an even later age, requiring full distribution of the inherited
account within 5 years of the retirement account owner’s death if they die
prior to April 1st of the year after they reach age 72.
SPECIAL RMD AND SUCCESSOR BENEFICIARY BENEFITS FOR SPOUSAL
IRA BENEFICIARIES LAST LONGER
Another important side effect
of the delay in the age at which RMDs must begin is that it potentially enhances two benefits available to surviving spouse
beneficiaries who choose to remain a beneficiary of the IRA or
employer-sponsored retirement plan account (as
opposed to, for instance, rolling the inherited account over into a retirement
account in their own name). The two benefits are:
·
Under IRC
Section 401(a)(9)(B)(iv)(I), spousal beneficiaries do not have to take
RMDs from the inherited account until the decedent would have needed to begin
taking RMDs of their own; and
·
Under IRC
Section 401(a)(9)(B)(iv)(II), if the surviving spouse
beneficiary dies before the distributions would have been required under IRC
Section 401(a)(9)(B)(iv)(I) as outlined above, the surviving spouse would be
treated as the original owner of the account (so that the surviving spouse’s
beneficiaries will be treated as the first beneficiaries of the account).
To maintain consistency with
the direct change to the age at which RMDs begin, the SECURE Act
includes language that applies the age change to these important spousal
beneficiary benefits. Thus, surviving spouse beneficiaries who establish and
maintain an account as an inherited IRA (or, where the plan allows, an
inherited plan account) will not have to take RMDs from the inherited account
until the decedent would have reached age 72.
Similarly, if the spouse-beneficiary
dies, themselves, before that time, they will be treated as the original
account owner, and their beneficiaries will be treated as having inherited
directly from the original retirement account owner.
For financial advisors, changes
to the “Stretch” rules (and perhaps the opportunity to offer MEPs and to use
lifetime annuities in qualified retirement plans) are likely to be the biggest
headlines out of the SECURE Act. But other changes made by the law, such as the
‘pushing back’ of the age at which RMDs must begin, will have a meaningful impact for some retirees.
Although while roughly 80% of
retirement account owners need to take more than their RMD amount each year
(presumably because they need, or want, that income to meet living expenses)
and likely won’t benefit from delayed RMD age, those who are lucky enough to be able to have enough wealth to delay
taking RMDs (disproportionately, the clients that financial advisors serve!)
can really benefit from this change.
The SECURE Act will provide an
extra year or two where income may be kept at lower levels, enabling extra
opportunities for partial Roth IRA conversions, or simply for preventing RMDs
from pushing individuals into higher tax brackets, paying higher IRMAAs, or
increasing other income-related costs.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
This 2nd article below highlights the RMD withdrawal
requirement changes starting in 2022.
RMD tables to change
in 2022 – less will have to be taken by owners and beneficiaries
November 12, 2021
Starting in 2022, the various life expectancy tables used by
owners and beneficiaries to calculate required minimum distributions (RMDs)
from qualified retirement plans, IRAs and nonqualified annuities are being
updated. This is being done to reflect the increase in life expectancies
experienced since the current tables came out in the early 2000s. The
current tables will still be used to calculate 2021 required minimum distributions (RMD).
What is the
impact of the new RMD tables for 2022
Ultimately, these changes
mean that smaller distributions will be required to be taken on an annual
basis, resulting in less taxation and longer lasting account balances (assuming
negative investment performance doesn’t severely affect the account balance),
creating more of an opportunity to grow the funds in the account.
For instance, the current
Uniform table life expectancy factor for a 73-year-old is 24.7 while the
updated Uniform table life expectancy factor for a 73-year-old is 26.5.
The Uniform table is used by most owners of IRAs and qualified retirement plans
to calculate their annual RMDs. The increase in the life expectancy factor from
the updated table means a smaller RMD for an account holder. For example,
assuming a prior year end IRA balance of $100,000, the old life expectancy
factor of 24.7 results in a RMD of $4,048.59, while the new life expectancy
factor of 26.5 results in an RMD of $3,773.59 – a $275 difference, which stays
in the IRA to continue to potentially grow tax deferred.
Beneficiaries of IRAs,
retirement plans and nonqualified annuities who will start using their life
expectancy to take out the annual RMD in 2022 will use the new factors from the
Single Life table to start their payout schedule (the so-called “stretch”
concepts), while those beneficiaries who have been using their life expectancy
to take out their annual RMD will need to adjust the life expectancy used in
2022 to reflect these new tables. To adjust the life expectancy used in 2022, the
beneficiary must determine what their life expectancy from the new Single Life
table would have been in their first distribution year, based on their age on
December 31 of that year, and then subtract one for each succeeding year to
obtain their 2022 life expectancy factor.
For example, assume the beneficiary of a nonqualified deferred annuity took
their initial life expectancy-based payment in 2015 and their life expectancy
that year under the old table was 29.6 years (age 55). In 2022 they would
determine their age 55 life expectancy from the new Single Life table (31.6)
and then subtract one from 2015 for every year until 2022:
·
30.6 (2016)
·
29.6 (2017)
·
28.6 (2018)
·
27.6 (2019)
·
26.6 (2020)
·
25.6 (2021)
·
24.6 (2022)
Making 24.6 the life
expectancy factor to use in 2022, instead of 22.6 under the old factors. They
would then continue subtracting one from the prior year life expectancy to
determine the life expectancy factor to use in each subsequent year.
Outlook for the
updated life expectancy tables
For many owners and beneficiaries, the overall increase in life
expectancy represented in the updated tables is a welcome change as it will
reduce the taxation on required distributions and provide more opportunity for
growth and longer lasting account balances. If you would like to learn
more about this change and see both the current and new tables check out
our white paper on the table
updates, or the final regulation notice at 26 CFR Part 1 [TD 9930] RIN
1545-BP11. Learn more about the payout options beneficiaries of IRAs and nonqualified annuities can
use, by viewing these white papers.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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