In November 2019, the IRS released its proposal to update the life expectancy tables used to calculate the annual Required Minimum Distributions (RMDs) from several tax-advantaged accounts, including IRAs and 401(k)s, for both account owners and their beneficiaries.
While the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law in December 2019, increased the RMD beginning age to 72 for owners of tax-advantaged retirement accounts, the IRS maintained the life expectancy tables developed in 2002 for such accounts.
The proposed changes to the IRS life expectancy tables applying to various retirement accounts, which likely would not go into effect until 2021 if the proposal is approved, are the first updates to the tables since 2002. Since then, life expectancy has increased more than 2% (or 1.6 years) for all Americans and even greater increases in life expectancy for Americans reaching age 65.
Changes made to the life expectancy tables will impact RMD factors used to calculate RMDs which are forced out of retirement accounts after reaching age 72 (formerly age 70.5) by the IRS. The three different life expectancy tables impacted by the proposed changes include the Uniform Lifetime Table, the Joint Life and Last Survivor Expectancy Table, and the Single Life Expectancy Table which apply to account owners as well as beneficiary spouses and non-spouses of various ages.
Despite longer life expectancies and therefore lower annual RMDs, changes may not have as much of a tax deferral benefit impact for retirement account owners and beneficiaries as was anticipated.
For example, consider Bill, a 72-year-old investor with an IRA valued at $1,000,000 on December 31st of last year. Under the current Uniform Lifetime Table used to calculate Bill’s RMD, he will need to withdraw 3.9062%, or $39,062, from his account by the end of this year. Under the newly proposed Uniform Lifetime Table, Bill is forced to withdraw 3.663%, or $36,630, from his IRA by the end of 2020—a difference of $2,432. If we assume Bill’s marginal tax rate is 22%, his income tax savings from the proposed RMD factors reflecting a longer life expectancy, and therefore a smaller RMD, might be about $535 for 2020.
Perhaps more meaningful income tax savings are possible for households and individuals with very large IRAs who fall into high income tax brackets. However, these changes are not likely to result in significant financial benefits for most owners and beneficiaries of tax-advantaged retirement accounts.