Eric Sachetta
The start of a new calendar year always brings changes to the tax code. This year, new retirement plan distribution rules took effect on January 1st that may affect owners of traditional IRAs and/or other retirement accounts with required minimum distributions. The IRS introduced new life expectancy tables for calculating RMDs. Both retirement account owners and beneficiaries who own inherited accounts should speak to their financial advisors about how (or if) these updates affect their tax and retirement plans.
What’s Changed with Retirement Plan Distribution Rules?
An executive order signed in 2018 included a directive that the Treasury Department examine current life expectancy data and determine whether distribution tables needed to be updated. As a result of that study, the IRS changed the life expectancy tables in Publication 590-B that tell retirement account owners how much they must take in RMDs at every age.
The IRS has three separate life expectancy tables, all of which were updated with higher distribution periods. The Uniform Lifetime Table is used for IRA owners who are unmarried, married with a spouse no more than 10 years younger, or married but their spouse isn’t the sole beneficiary of their retirement accounts. The Joint Life and Last Survivor Expectancy Table is for account owners whose spouses are at least 10 years younger and the sole beneficiaries of their accounts. The Single Life Expectancy Table is used to determine RMDs for non-spouse beneficiaries of retirement accounts.
The updated life expectancy tables raised distribution periods, starting on January 1, 2022. Distribution periods are used to calculate how much of your account balance you must take each year from any eligible account, starting at age 72. (These rules don’t apply to Roth IRAs, which don’t have RMDs.) Your distribution period is divided into your account balance to determine your RMD, so higher distribution periods translate to lower RMDs.
Here’s an example. Say you’re turning 72 in 2022, have an IRA with $800,000 and meet the criteria for the Uniform Life Table. According to the updated ULT, the distribution period at age 72 is 27.4. $800,000/27.4 is about $29,197. You must take at least that much from your traditional IRA before the end of 2022 or pay tax penalties.
For comparison, let’s say you turned 72 in 2021 with $800,000 in your IRA. Under the old ULT, the distribution period at age 72 was 25.6. $800,000/25.6 is $31,250.
The IRS also added a transition rule that affects a very specific group of people: non-spouse beneficiaries who have inherited IRAs or other RMD accounts from people who died before January 1, 2022. Since the SECURE Act eliminated the stretch IRA, a non-spouse beneficiary of an inherited account can’t defer distributions indefinitely. These beneficiaries have 10 years from the account owner’s date of death to withdraw all the money. The new transition rule essentially allows beneficiaries to reset their distribution periods based on the new tables, which should slightly decrease RMDs for these beneficiaries.
How Will New RMD Rules Affect You?
Many retirement account holders won’t be affected by new retirement distribution plan changes. If you’re a retiree who already takes more than the minimum distribution from your retirement accounts, lower RMDs may be irrelevant to you.
But for retirees who have other income and can afford to take the minimum from their IRA or 401(k) accounts, lower RMDs can translate to real tax advantages. Because distributions are taxed as regular income, taking the absolute minimum helps you minimize your tax bill. For someone who’s on the cusp of two tax brackets, lower RMDs could even be the difference that keeps them in the lower bracket.
If you’re not sure how lower RMDs affect your tax planning and retirement planning strategies, consult your advisors. Updated life expectancy tables could slightly alter some of the financial projections that your advisors have prepared for you to determine if your retirement savings are on track. And if you’re a beneficiary who’s currently taking distributions from an inherited IRA, speak to your tax advisors about whether your RMD needs to be recalculated based on the new tables.
It’s worth noting that more changes to retirement plan distribution rules could be coming, if there’s any forward movement with the bill known as “the SECURE Act 2.0” (aka, the Securing a Strong Retirement Act of 2021). It would build on the original SECURE Act of 2019, which raised the RMD age from 70 1/2 to 72.
SECURE Act 2.0 originally sought to raise the RMD age to 73 starting in 2022, with future hikes to age 74 starting in 2029 and 75 starting in 2032. Bills to make SECURE Act 2.0 law stalled in both the House and Senate in 2021, but lawmakers could return their attention to this piece of legislation in 2022. We’ll just have to wait and see what other new developments happen around retirement plan distribution rules.
Sachetta, LLC helps clients at all stages of retirement planning prepare for what comes next. We’re here to answer any questions you may have about retirement plan distribution rules, or anything else you’re wondering about RMDs, tax planning or retirement planning. Contact me today!
Eric Sachetta, ChFC®, CFP® Eric is a Certified Financial Planner™ Practitioner. He holds a bachelor’s degree in Corporate Finance & Accounting from Bentley University. He joined our team full-time in 2016, after working part-time throughout high school and college. Eric focuses on financial planning and client relationship management.