New Life Expectancy Tables for Calculating RMDs
The IRS recently released updated tables for use in calculating required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs) and annuities, and certain other tax-favored, employer-provided retirement arrangements. The updated tables take effect in 2022 and will generally result in smaller RMDs. RMDs for 2021 will be calculated under the current tables.
Current tax law says that individuals with tax-favored retirement plans are required to begin taking annual minimum distributions from their accounts once they reach age 72 (age 70½ if born before July 1, 1949). That's the case even for those with sufficient retirement income from other sources who do not want to touch the money in their retirement plan.
Generally, the required distribution amount is calculated by dividing the individual's account balance at the end of the prior year by an age-based factor taken from the IRS's "Uniform Lifetime Table." However, a different table must be used under certain circumstances.
Account owners have to be careful since there is a penalty for taking out too little. The penalty is 50% on the amount not withdrawn as required. There's no penalty for taking out more than the required annual amount. However, any additional withdrawals are not counted toward RMDs for future years.
Why Updates Now?
The current tables were put in place almost two decades ago, and life expectancies have since increased. The push to update the life expectancy tables was driven by a recognition that the effectiveness of tax-favored retirement plans could be increased by allowing retirees to retain sufficient retirement savings in their accounts for later years.
Example: Under the current Uniform Lifetime Table, a 72-year-old calculates her RMD by dividing her retirement account balance (as of the end of the prior year) by a life expectancy of 25.6 years. Under the updated table, a 72-year-old individual will use a life expectancy of 27.4 years to calculate her RMD. The updated tables mean that plan participants and IRA owners can now retain larger amounts in their retirement plans to account for the possibility that they may live longer.