What to know about life ex­pectancy ta­ble changes and RMD

The Kansas City Star - - Business - BY MARK HOWE Spe­cial to The Star Mark Howe is a Cer­ti­fied Fi­nan­cial Plan­ner pro­fes­sional and mem­ber of the Fi­nan­cial Plan­ning As­so­ci­a­tion of Greater Kansas City. He is a Part­ner & Se­nior Fi­nan­cial Plan­ner with Fron­tier Wealth Man­age­ment.

The SE­CURE Act (which stands for Set­ting Ev­ery Com­mu­nity Up for Re­tire­ment En­hance­ment) has re­ceived quite a bit of at­ten­tion re­cently as a re­sult of an in­crease in the re­quired min­i­mum dis­tri­bu­tion (RMD) age from 70½ to 72 for many in­di­vid­u­als who have IRAs and re­tire­ment plans.

Yet un­re­lated to this new law (in fact, be­fore this new law), the Trea­sury De­part­ment is­sued pro­posed reg­u­la­tions to change the life ex­pectancy tables for how these RMDs are cal­cu­lated.

These new life ex­pectancy tables would re­flect the in­crease in life ex­pectancy since the cur­rent tables were last up­dated in 2002. As life ex­pectancy has con­tin­ued to in­crease over the last 18 years (with the ex­cep­tion of twice in the last three years), ad­just­ing these tables ap­pears war­ranted.

It should be noted, how­ever, that chang­ing the life ex­pectancy tables, and there­fore how RMDs are cal­cu­lated, is cur­rently just a pro­posal and not yet of­fi­cial.

With the in­crease in the age of RMDs tak­ing ef­fect, some be­lieve there is no need to change how RMDs are cal­cu­lated. Oth­ers ar­gue that the life ex­pectancy tables now in use, from 2002, need to be up­dated to re­flect the cur­rent mor­tal­ity rates.

The new life ex­pectancy tables and RMD cal­cu­la­tions (if of­fi­cially adopted) would not go into ef­fect un­til 2021 and would there­fore not af­fect RMDs un­til next year. This pro­posal has no ef­fect on cur­rent RMDs that must be dis­trib­uted in 2020.

These changes are not nec­es­sar­ily sub­stan­tial and may not even be no­tice­able for many in­di­vid­u­als.

Here are three ex­am­ples:

The pro­posed tables

● would in­crease life ex­pectancy for a 72-year-old (gen­er­ally the “new” age at which RMDs must be­gin) from 25.6 years to 27.3 years. For a re­tire­ment ac­count bal­ance of $100,000 (as of Dec. 31, 2020,) the RMD would de­crease from $3,906.25 to $3,663.00, or a re­duc­tion of $243.25 (a 6.23% re­duc­tion in the RMD amount.).

The pro­posed tables

● would in­crease life ex­pectancy for an 80-year-old from 18.7 years to 20.2 years. For a re­tire­ment ac­count bal­ance of $100,000 (as of Dec. 31, 2020) the RMD would de­crease from $5,347.59 to $4,950.50, or a re­duc­tion of $397.10 (a 7.43% re­duc­tion in the RMD amount).

In the case of a 90year-old,

● the pro­posed tables would in­crease life ex­pectancy from 11.4 years to 12.1 years. For a re­tire­ment ac­count bal­ance of $100,000 (as of Dec. 31, 2020,) the RMD would de­crease from $8,771.93 to $8,264.46, or a re­duc­tion of $507.47 (a 5.79% re­duc­tion in the RMD amount).

Note that all of these ex­am­ples are based upon Ta­ble III (Uni­form Life­time Tables), per IRS Pub­li­ca­tion 590.

In gen­eral, the RMD amount is de­creas­ing 3% to nearly 8%, de­pend­ing on age. Those in their late 70s to mid-80s would re­ceive the largest per­cent­age re­duc­tion, while those in their mid to late 90s would gen­er­ally see the small­est per­cent­age re­duc­tion.

These RMD re­duc­tions are not large but may be wel­come none­the­less.

Even if re­tire­ment ac­count val­ues con­tinue to ap­pre­ci­ate this year, the RMD re­quired next year could ac­tu­ally de­crease although the ac­count owner will be one year older — which cer­tainly sounds coun­ter­in­tu­itive.

While these changes are not yet of­fi­cial, they are likely to take ef­fect.

Again, this will not af­fect RMDs dis­trib­uted this year in 2020 (based on Dec. 31, 2019 val­ues). This would af­fect RMDs dis­trib­uted in 2021 (based on Dec. 31, 2020 val­ues).


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