How new life expectancy tables have an effect on required withdrawals from IRAs

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Anyone faced with minimum retirement account withdrawal requirements should note that there has been a change in how these amounts are calculated.

Starting this year, new IRS life expectancy tables are used to determine required minimum distributions, or RMDs. While using the modified tables should generally be easy for most account holders, there are a few cases you need to be aware of.

“There are some tricky situations that are only going to happen this year,” said Ed Slott, CPA and founder of Ed Slott and Co.

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RMDs apply to 401(k) plans—both traditional and Roth versions—and similar workplace plans, as well as most individual retirement accounts. (Roth IRAs have no required withdrawals until after the account holder’s death.)

Before the Secure Act came into force in 2020, RMDs were generally required once a person reached the age of 70. For anyone who has reached this age in 2020 (or will reach it later), RMDs occur at age 72. In other words, if you were born on July 1, 1949 or later, you can wait until age 72, Slott said.

The amount you must withdraw each year is generally determined by dividing each qualifying account’s year-end balance by a “life expectancy factor” as defined by the IRS. The agency’s new tables assume you’ll live longer, which may result in a reduction in the amount you need to withdraw.

“They give you about a year or two more life expectancy,” Slott said.

For example, under the new unified mortality table, a 75-year-old would use 24.6 as a factor. For example, if the account balance is $500,000, dividing the amount by this factor gives an RMD of approximately $20,325.

In the old table, the factor for a 75-year-old was 22.9, or $21,834 for a $500,000 account.

They give you about an extra year or two of life expectancy.

Ed Schloss

Founder of Ed Slott and Co.

One thing to be careful about is anyone who turned 72 in the second half of last year. (Someone who reached that age in the first half of 2021 would have been subjected to the RMD age of 70½.)

Generally, in a person’s first year of RMD, this required withdrawal can be deferred until April 1 of the following year (although this means having two RMDs in a single year). So if you’ve moved your RMD 2021 to take advantage of this rule, make sure you’re using the correct account balances and life expectancy charts.

That is, your RMD 2021 would be based on the old life expectancy tables and account balance as of December 31, 2020. Your RMD 2022 would be based on the new tables and balance at the end of 2021.

Inherited Retirement Accounts

For inherited IRAs, the calculation of RMDs is handled differently.

The Secure Act eliminated the ability for most beneficiaries to extend withdrawals over their lifetime (called a stretch IRA) if the original account holder died in 2020 or later.

Now, unless they make an exception, beneficiaries must withdraw all assets from the inherited account by December 31 of the 10th year after the account holder’s death.

Exceptions to this rule are where the Beneficiary is a surviving spouse, a minor child of the Account Holder (at least until they come of age, usually 18 years of age), a disabled Beneficiary, or one who is no more than 10 years younger than the original Account Holder. These beneficiaries can still extend payments based on their life expectancy.

Additionally, beneficiaries who had an inherited account prior to 2020 and used the stretch provision can continue to do so, Slott said.

In each case, the method of determining your RMDs from an inherited account is different (and spouses have several options). In the first year you look at the factor for your age in the single mortality table. The next year, you reduce that original factor by one, and then subtract one each subsequent year.

This year you get a one-time reset: look at the factor in the single death table for the age at which you started taking those RMDs and reduce that number by one for each past year.

“It looks like the new table was in effect when you inherited the account,” Slott said. “But it hasn’t affected the RMDs you’ve taken since then.”

Once you reset, reduce your factor by one every year.

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