Changes proposed to required minimum distribution tables

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 90-year-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).

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.