The Internal Revenue Service has released proposed regulations to update the life expectancy tables for required minimum distributions from qualified retirement plans, IRAs and annuities.
The proposed regs, which will be published in the Federal Register on Friday and be out for a 60-day comment period, seek to reduce RMDs to reflect longer life expectancies.
With the proposed change, a retiree’s first RMD would be 3.44% of their account, down from 3.65%, according to Jeff Levine, a CPA and financial planner.
The regs affect participants, beneficiaries and plan administrators of these qualified retirement plans and other tax-favored employer-provided retirement arrangements, as well as owners, beneficiaries, trustees and custodians of IRAs and annuities.
“By taking the longer life expectancies into account, the proposed regulations would allow participants to retain larger amounts in their retirement plans,” Andy Friedman, founder and principal at The Washington Update, told ThinkAdvisor on Thursday. “In doing so, the proposal affords the participant greater tax deferral than under the current rules.”
The proposed regulations provide this example:
A 70-year-old IRA owner who uses the Uniform Lifetime Table to calculate required minimum distributions must use a life expectancy of 27.4 years under the existing regulations. Using the Uniform Lifetime Table set forth in the proposed regulations, this IRA owner would use a life expectancy of 29.1 years to calculate required minimum distributions.
“If finalized (which I fully expect will happen), the new RMD tables would apply to distributions beginning for the year 2021,” Levine said Thursday on Twitter.
The change would not be a major one for most retirees, who tend to take bigger distributions than required, Levine said in a Twitter message. But it “might result in a meaningful difference” for those who live a long time and only take RMDs, he said.
The Treasury Department and IRS state that they’ve examined the life expectancy and distribution period tables as well as currently available mortality data.
As a result of their review, Treasury and IRS have determined that those tables should be updated to reflect current, longer, life expectancies. The proposed regs would update those tables.
Another example states that under the existing regs, a 75-year-old surviving spouse who is the employee’s sole beneficiary and uses the Single Life Table to compute RMDs must use a life expectancy of 13.4 years.
Under the proposed regs, the spouse would use a life expectancy of 14.8 years.
– Katie Rass contributed reporting.
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