After a one year delay, the new Uniform Lifetime Table became effective on January 1st, 2022. This means IRA (and retirement plan) account holders do not need to withdraw as much from their accounts to satisfy their Required Minimum Distributions (RMDs) as under the previous rules.
Reflecting Increased Life Expectancies
This will be the first time the IRA distribution tables have been updated since 2002, despite the fact that since then, life expectancy has increased more than 2% (or 1.6 years) for all Americans, and more than 8% for Americans who have reached the age of 65! The average life expectancy for a 65-year-old in 2002 was an additional 17.9 years. That had grown to 19.4 years by 2017. Interestingly, although life expectancy has increased since 2002, it has leveled off and actually declined slightly over the past few years.
How Much Are RMDs Reduced?
The lower RMDs allow owners of IRAs, and other qualified retirement accounts, to keep more of their money growing tax-deferred. The changes are noticeable, but not huge. For example, the percentage that an IRA account holder needs to withdraw at age 72 (the age RMDs begin) dropped from 3.91% to 3.65% of the account value. A 72-year-old with a $1 million IRA can take $2,600 less ($36,500 vs $39,100) based on the new Uniform Lifetime Table. This is good news for IRA owners who do not need the income and would like to keep their money invested tax-deferred. However, only about 20% of IRA owners take the minimum required each year, according to the IRS. Some investment providers dispute this statistic. Nevertheless, there is a large segment of the population that takes more than the minimum required from their IRA and that cohort will see no impact / benefit from the new tables.
Reduction in RMD Varies by Age
The differential between the RMD based on the old Uniform Lifetime Table and the new one is not static. It varies by age. The biggest difference occurs at age 83, when RMDs are 7.98% lower under the new table. (View: Old vs. New Uniform Lifetime Table, and differential by age). The differential declines after age 83, and the required distribution is the same in both tables (new and old) by age 101. The RMD for an 83-year-old IRA account holder with a $1 million balance was $61,400 under the old table, but dropped to $56,500 under the new table. The RMD is $4,900 less in this example. The tax savings depends on the account owner’s marginal tax-bracket, but as an example, a taxpayer in the 24% tax bracket would pay $1,176 less in taxes ($4,900 x 24%).
All Three Tables Will Be Affected
The proposed changes will also affect the Single Life table (used to calculate RMDs from inherited IRAs) and the Joint Lifetime Table (used for married couples when the spouse is more than 10 years younger than the IRA account owner).
Lower RMDs will not make a major difference in the average American’s financial plan. The largest benefit will accrue to wealthier households that are in higher tax brackets and can afford to take only the minimum required from their qualified accounts. The additional tax-deferral benefits can be meaningful for households that have large IRAs and only take the minimum RMD each year for 20+ years. Regardless of magnitude, any tax-savings is welcomed, and this update was overdue.
Have a great week.