Increasing Life Expectancies Lead to Lower RMDs

According to the current Administration, polling shows that nearly half of Americans are concerned they will not have enough money to live on during retirement.¹ One proposal for addressing this concern is to explore whether retirees could keep money in their retirement plans and IRAs longer and spread retirement savings distributions over a longer period of time.

Current required minimum distribution (RMD) rules require an IRA owner to withdraw assets from their IRA over their life expectancy beginning at age 70½. If a balance remains at the IRA owner’s death, a beneficiary must generally withdraw the balance over the beneficiary’s life expectancy. The purpose of these rules is to ensure that the favorable tax treatment afforded an IRA is used primarily to provide retirement income to the IRA owner. RMDs mitigate the cost of deferred taxation on retirement savings by ensuring those tax-deferred assets are eventually included in taxable income.

In August 2018, the president issued Executive Order 13847 mandating certain government agencies to review and revise rules and regulations that could be hindering businesses from sponsoring workplace retirement plans (e.g., unnecessary costs or burdens) or that are reducing retirement plan effectiveness for participants.² The Treasury Department/IRS were specifically instructed to examine the life expectancy tables used to calculate RMDs to determine whether the tables should be updated to reflect current mortality data and whether these updates should be made annually or on another Periodic basis.² 

In response to the Executive Order, the IRS has determined the life expectancy tables should be updated and has proposed updates to the life expectancy and distribution period factors used to determine RMDs after age 70½ and beneficiary payments after the death of the accountholder.³ These factors are found in two tables used for calculating RMDs from IRAs: the Uniform Lifetime Table and the Joint and Last Survivor Life Expectancy Table. The Single Life Table, which is used for calculating annual beneficiary payments after the death of the accountholder, has also been updated. These tables were last updated in 2002.

The new tables based on longer life expectancies result in smaller RMDs and beneficiary payments and should increase the effectiveness of these tax-favored retirement programs by allowing individuals to retain more retirement savings in these programs for their later years. For example, the life expectancy factor for a 71-year-old based on the existing Uniform Lifetime Table is 26.5. Under the proposal, the new factor for a 71-year-old would be 28.2. This means that the RMD for a 71-year-old IRA owner with a $300,000 account balance would decrease from $11,321 to $10,638.

The IRS estimates roughly 4.6 million individuals, or 20.5% of all individuals required to take RMDs from an affected retirement plan, will make withdrawals at the minimum required level in 2021, and might reduce withdrawals as a result of the rule.³ The IRS also estimates that in 2021, the proposed regulations would lead to an $8.1 billion reduction in taxable distributions from affected IRAs and retirement plans. ³

The IRS is accepting comments on these proposed updates through January 7, 2020, and will hold a public hearing on January 23, 2020, before issuing final regulations. If these proposed regulations are finalized without changes, the new tables will be used for calculating RMDs for 2021 and beyond.

If an IRA owner younger than 59½ is taking payments from an IRA under a substantially equal periodic payment arrangement using the RMD method, they will also start using the new factors in 2021 to calculate their payments. If a payment arrangement started before 2021 and the payment amount changes in 2021 and later years because of the new life expectancy tables, the IRS will not see this as a modification that would trigger retroactive penalties.

For More Information

We will keep you informed as to the status of this proposal. If you have any questions about your RMDs from STRATA Trust IRAs, please contact us at 866-928-9394 or Service@StrataTrust.com.

_Footnotes

_{1 White House Fact Sheet: President Donald J. Trump is Strengthening Retirement Security for American Workers, August 31, 2018}

_{2 White House, Executive Order on Strengthening Retirement Security in America, August 31, 2018}

_{3 Department of the Treasury, IRS, Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions, November 8, 2019}

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