The IRS recently proposed changes to life expectancy tables that would decrease the amount of annual required minimum distributions (RMDs) from retirement accounts. The tables currently in use are close to 20 years old and have not reflected Americans living longer, on average 1.6 years greater, over that time.
Unlike many other age-based or income-based rules connected to retirement savings and taxes, the life expectancy tables for retirement distributions do not have a set framework for how often updates are made. If approved after a public hearing process in early 2020, the new tables would be effective starting January 1, 2021.
Unrelated legislation known as the SECURE Act alters other aspects of retirement planning. The life expectancy table changes, however, do not require Congressional action.
With the new tables, individuals could benefit from additional tax-deferred growth due to lower required distributions. The impact will be measurable, but in most instances only modest. Consider this example:
A retiree in 2021 who is age 70.5 with a $1,000,000 IRA as of 12-31-2020 would take an RMD of $36,500. If the new tables are applied, that same retiree would take an RMD of $34,364 or $2,136 less. Thus, if a taxpayer were in the 24% tax bracket, the one year Federal income tax savings would be $513.
The difference will be more noticeable for those with large IRAs, high marginal Federal income tax rates, and in states with an income tax. The changes would apply to both original IRA owners with RMDs and to Inherited IRA beneficiaries. It is relevant to note that the income tax reduction from the lower distribution is not eliminated, only deferred.
The cumulative impact from lower lifetime RMDs may become more evident over longer periods of time, as tax-deferred accounts accumulate more than current financial plans illustrate. The total difference will be subject to many unknown factors, including investment performance, income tax reform, and more significant potential changes like those in the SECURE Act or other future legislation.
In general, the table changes will be managed without need for individual involvement, as IRA custodians such as Schwab apply them automatically at the start of a new year in 2021. That being said, it may be important to pay attention to retirement rules over the next several years as new proposals are introduced that could affect retirees and beneficiaries.
For the new tables and their effective date, see Proposed Treasury Regulation 1.401(a)(9)-9.
Ed is Director of Financial Planning of Heritage Financial Services, where he creates and shapes best practices in financial planning for the firm. In this role, he mentors the wealth advisors and consults on unusual or highly complicated client cases.