Effective in 2022, RMDs from retirement accounts will be calculated with new life expectancy factors, making required distributions slightly less than they would’ve been with the old factors.
Updated Life Expectancy Factors
For the first time since 2002, the tables that are used to calculate required minimum distributions (RMD) have been updated by the IRS to reflect modern life expectancies. These updates are not automatic, and the IRS only reviews them every 10 years (or if a new study of “individual annuity mortality experience” is published). These updates were supposed to go into effect starting in 2021, but the pandemic caused delays. Also due to COVID-19, 2020 RMDs were waived resulting in three separate sets of rules for 2020, 2021, and 2022. With the new tables, account holders will be able to keep retirement savings in tax-advantaged accounts for longer periods of time.
Calculating Your RMD
An RMD is a withdrawal from an Individual Retirement Account (IRA), including SIMPLE and SEP IRAs (but not Roth), 401(k) plans, 403(b) plans, 457(b) plans, and TSP accounts. These disbursements are mandated by the IRS, and if not taken, there is a harsh 50% penalty. With the SECURE Act’s passage in 2019, the age that RMDs begin was bumped up from 70½ to 72 for the account owner. Those who have inherited an IRA as a beneficiary also have to take RMDs, and that amount depends on the deceased’s age. An RMD calculation is the same for almost all situations, except non-eligible beneficiaries who inherited the IRA in 2020 or later. If the IRA was inherited in 2020 or later, the SECURE Act requires the withdrawal of all funds according to a 10-year payout rule – not a life expectancy factor. Outside of that exception, the calculation is the following:
- “The balance of the account as of December 31st of the previous year”
- Divided by: “The life expectancy factor”
Because the year-end balance is divided by the factor, there is an inverse relationship between the RMD and the life expectancy factor: when one goes up, the other goes down. The new factors are slightly higher, so the amount of the RMD is lower, which leaves more money remaining in a tax-protected account.
There are three tables that are used to determine a given factor.
- The Uniform Lifetime Table – Used in calculating the lifetime RMDs for most IRA owners – the only exception is for those who need to use the next table instead.
- The Joint and Last Survivor Table – For IRA owners whose spouse is both their sole beneficiary and 10 or more years younger than them, this table is used. All other IRA owners use the previous table.
- The Single Life Table – Used to calculate RMDs for IRA beneficiaries after they have inherited the account (the original owner is deceased.) This applies to all IRA beneficiaries who inherited the IRA in 2019 or earlier, and also applies to “Eligible Designated Beneficiaries,” meaning a spouse, minor, chronically ill, or disabled individual. For beneficiaries who don’t fit in this definition, and inherited the IRA in 2020 or later, the RMD is determined by the previously mentioned 10-year rule.
For the third table, there is a new “life expectancy reset” that will impact beneficiaries who inherited the IRA before 2020. How it works can get complicated, and more details can be found here.
|Age||Old Life Expectancy Factor||New Life Expectancy Factor||Change|
To show how this is beneficial for those subject to RMDs, here is an illustration of an RMD for someone aged 75 in 2021 with a 2020 year-end account balance of $100,000:
- 75 = 22.9 factor
- $100,000/22.9 = $4366.81 RMD in 2021
Now, here is an example of a 75-year-old IRA owner in 2022 with a 2021 year-end account balance of $100,000:
- 75 = 24.6 factor
- $100,000/24.6 = $4065.04 RMD in 2022
Life Expectancy Factors for RMDs
**Written by David Fei, CERTIFIED FINANCIAL PLANNER™, ChFEBC℠. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of David Fei and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.**