Required minimum distribution affected by life expectancy update
Required Minimum Distributions (RMDs) are making headlines again! Minimum required distributions are back after a brief hiatus for Covid-19 in 2020. Two years into a pandemic, retirement is different, and the new SECURE Act RMD rule and IRS life expectancy tables introduce additional complexity and confusion. And now, RMD withdrawal amounts from pension plans may change, thanks to new life expectancy measures from the IRS, according to GoBankingTariffs.
In 2022, new life expectancy tables will come into effect, which could complicate required minimum distributions from Individual Retirement Accounts (IRAs), 401(k), and other types of qualified retirement plans. Employers and members will need to pay particular attention to the impact of these changes on withdrawals.
Before the SECURE (Setting Every Community Up for Retirement Enhancement) Act passed in late 2019, most people were required to withdraw from retirement accounts, such as IRAs, SEP IRAs, SIMPLE IRAs, or retirement plans. in the workplace when they reached the age of 70. 1/2. However, legislation has ensured that those whose birthday is July 1, 2019 or later do not have to take RMDs until they reach the age of 72. Roth IRA withdrawals are not required until the owner is deceased.
In other words, if a person reached 70 1/2 before 2020, they had to take RMDs. For those who have been or will be 70.5 years old in 2020 or later, RMDs are not compulsory until they reach the age of 72.
The problem is that the IRS’ new life expectancy tables assume that people will live longer. According to CNBC, quoted by GoBankingRates, “The amount you must withdraw each year is generally determined by dividing the previous year-end balance of each qualifying account by a ‘life expectancy factor’ as defined by the IRS. “. Since the agency’s tables assume a longer lifespan of around one to two years, this may reduce the amount of withdrawal required.
Here is a concrete example, again provided by CNBC and quoted by GoBankingRates: “According to the new uniform mortality table, a 75-year-old person would use 24.6 as a factor. If the account balance is $500,000, dividing the amount by 24.6 gives an RMD of approximately $20,325. According to the old table, the factor for a 75-year-old was 22.9, or $21,834 for a $500,000 account.
Additionally, retirement account holders could end up receiving two distributions in a single year in their first year of RMD. This is because the required initial withdrawal can be delayed until April 1 of the following year, which means someone would have to take an RMD on their 72nd birthday, plus one in April. This could push them into a higher tax bracket, which could have tax consequences and potentially impact Medicare income eligibility requirements.
People who have delayed their 2021 RMD to take advantage of this rule should ensure they are using the correct account balances and life expectancy tables. A 2021 RMD would be based on the old life expectancy tables and the individual’s account balance as of December 31, 2020. However, the 2022 RMD would be based on the new IRS life expectancy tables and the individual’s account balance at the end of the year. 2021.
Employers will likely receive questions from retired members about the new required minimum distribution withdrawal requirements. Plan sponsors and plan trustees should be prepared to answer these questions in an informed manner or to refer plan members to the plan’s financial advisor. The financial advisor will be ready to provide advice tailored to a participant’s particular situation. Communication between plan sponsors and advisors is key during this transition.
Steff Chalk
Steff C. Chalk is executive director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff is also Executive Director of The Plan Sponsor University and is currently a professor at The Retirement Adviser University.