Required Minimum Distributions – Life Expectancy and Distribution Tables Updated
On November 12, 2020, the Internal Revenue Service issued Final Regulations providing guidance relating to the life expectancy and distribution tables that are used to calculate required minimum distributions (“RMDs”) from qualified retirement plans, individual retirement accounts and annuities and certain other tax favored employer provided retirement accounts. The new tables are to be used for determining RMDs beginning January 1, 2022. The current tables continue to apply to RMDs for 2021. RMDs were not required for 2020 due to legislation arising out of the pandemic. The Secure Act recently changed the year in which distributions were required to begin from 70 ½ for individuals born before June 30, 1949 to age 72 for individual born after June 30, 1949.
The new tables allow distributions to be spread over more years by increasing life expectancies by about one to two years longer than under the existing tables. For example, a 72 year in 2021 is considered to have a life expectancy of 25.6 years and thus, must use a distribution period of 25.6 years. Under the new Uniform Distribution Tables effective beginning 2022, a 72 year old uses a distribution period of 27.4 years. For an account valued at $1,000,000, this amounts to a reduction of $2,566.15 ($39,062.50 – $36,496.35) in the RMD in the first year. The new tables reflect life expectancies through age 120, with a 120 year old having a 2 year life expectancy. The old tables calculated life expectancies through age 115. The text of the final regulations which also contains the new tables can be found at https://www.govinfo.gov/content/pkg/FR-2020-11-12/pdf/2020-24723.pdf.
ACCOUNT OWNERS
The Uniform Lifetime Table is used to determine lifetime RMDs to most plan participants over the age of 72 including when a spousal beneficiary is a sole designated beneficiary but who is not over ten (10) years younger than the account owner or when the spouse is not the sole designated beneficiary. The Uniform Lifetime Table is also used to calculate distributions required for an individual who has inherited a tax deferred retirement account from their spouse and has selected to transfer the account into their own name. The Joint and Last Survivor Table is only used to determine RMDs to plan participants over the age of 72 when a spouse is a sole designated beneficiary and who is over ten (10) years younger than the account owner. The revised tables also affect individuals receiving Substantially Equal Periodic Payments from IRAs or company retirement plans to avoid the ten (10%) percent penalty on distributions received prior to attaining age 59.5.
ACCOUNT BENEFICIARIES
As a result of changes made by the Secure Act which is effective for death occurring on or after January 1, 2020, the Single Life Table is used only by Eligible Designated Beneficiaries. Eligible Designated Beneficiaries are individuals that fall into one of five categories as spouses, disabled or chronically ill individuals, minor children of the account owner/participant or someone who is no more than ten (10) years younger than the account owner/participant. Generally, beneficiaries of accounts whose owner passed away prior to January 1, 2020 used the Single Life Table. Individuals other than Eligible Designated Beneficiaries are now subject to the ten (10) year rule and no longer use life expectancy tables.
ESTATE vs. INDIVIDUAL NON-ELIGIBLE DESIGNATED BENEFICIARIES
Prior to the adoption these final regulations, under the Secure Act changes there was a benefit in naming your estate as the beneficiary of your retirement plan account in lieu of individuals that do not qualify as Eligible Designated Beneficiaries. This benefit resulted from the owners remaining life expectancy (often referred to as the “ghost” life expectancy), which is used to calculated RMDs when the owner dies after attaining the owner’s required beginning date, being longer than the 10 year distribution period for ages 72 through age 80 as shown below.
| Ghost Life Expectancy | ||
| Age | Years Prior to 2022 | Years After 2021 |
| 72 | 15.5 | 17.2 |
| 73 | 14.8 | 16.4 |
| 74 | 14.1 | 15.6 |
| 75 | 13.4 | 14.8 |
| 76 | 12.7 | 14.1 |
| 77 | 12.1 | 13.3 |
| 78 | 11.4 | 12.6 |
| 79 | 10.8 | 11.9 |
| 80 | 10.2 | 11.2 |
| 81 | 9.7 | 10.5 |
This benefit is amplified under the new life expectancy tables. As an example, a 72 year old who passes away and names the owner’s children as beneficiaries will be required to distribute the entire account within 10 years (by December 31st of the year containing the 10th anniversary of the owner’s death). However, if the owner had named his estate as the beneficiary, under the new life expectancy tables, the account could be distributed over a period of 17.2 years, an increase in the distribution period of over 7 years. In years of rising income tax rates this can be a meaningful difference. However, the beneficiary designation must be monitored as the owner attains ages when the 10-year distribution period of designated beneficiaries will be longer than the ghost life expectancy.
It may be possible to draft beneficiary designations to consider the age of the owner, so the beneficiary designations do not have to be changed. An often-cited detriment to naming the estate as the beneficiary is that the estate must be kept “open” during the period distributions are being made to receive the distributions, meaning that the executor remains responsible to collect payments, distribute them to the beneficiaries of the estate and file an annual estate income tax return. However, there is authority in the form of Private Letter Rulings from the Internal Revenue Service which allow the executor of an estate to transfer the inherited accounts to the beneficiaries of the estate to limit the continuing administration. In such case, the same distribution period that applied to the estate continues to apply to the individual beneficiaries of the estate. Before proceeding, it is important to remember that Private Letter Rulings cannot be relied on as authority by anyone other than the taxpayer to whom it issued. In addition, not all custodians allow such transfers to be made but the executor of the estate can always transfer the account to a custodian which permits such transfers. As Roth accounts become more popular, the additional tax free growth and tax free distribution of the Roth at the end of the distribution period can be significant.