The IRS recently issued final regulations that, in the future, will reduce required minimum distributions (RMDs) on IRAs, other qualified retirement plans and annuities.
It is a small help for retirement account owners who don’t need all the money they’re required to take from their plans each year.
Most owners of IRAs and other qualified retirement plans who turn age 72 after 2019 must take RMDs from the accounts beginning in the year they turn 72. Older taxpayers were required to begin RMDs after turning age 70½. The amount of the RMD each year is based on the account owner’s life expectancy as determined by tables issued by the IRS.
The current life expectancy tables have been in place for a while, and average life expectancy has increased since the tables were issued. So, in November 2019, the IRS issued proposed regulations with updated life expectancy tables. The IRS recently issued the final version of the regulations.
In the proposed regulations, it was anticipated that the final regulations would take effect for tax years after 2020. But because retirement plan sponsors and IRA custodians need time to update their systems, the final regulations take effect for calendar years beginning on or after January 1, 2022.
The new life expectancy tables use the life expectancies from the 2012 Individual Annuity Mortality Basic Tables and adjust them for anticipated mortality improvements through 2022. The new tables make modest changes in life expectancy. In the current tables, the life expectancy of a 70-year-old is 27.4.
In the new tables, life expectancy increases to 29.1 years. When the proposed regulations were issued, the IRS estimated that the new tables would cause only a 1% increase in an IRA balance at age 90 compared to the existing tables.
RMDs are a negative factor for IRA owners who have other income and assets that can be used to maintain their standards of living. Taking RMDs they don’t need from their traditional IRAs increases their taxable income and income taxes.
The RMDs also increase adjusted gross income, which can cause increases in the amount of Social Security benefits that are taxed and the Medicare premium surtax (also known as IRMAA).
RMDs also can trigger increases in other taxes or decreases in tax benefits.Under the life expectancy tables, the percentage of the IRA that must be distributed each year increases. So, the tax problems of unneeded RMDs increase over time.
To avoid these problems, IRA owners who have sufficient income and assets outside their IRAs should consider strategies to reduce future RMDs. They can convert a traditional IRA to a Roth IRA. Or they can take distributions from the IRAs before they are required to and pay the taxes at today’s rates. The after-tax amount can be used to fund life insurance payable to their children, make gifts to their children or other loved ones, or invest in taxable accounts that can be inherited by their children.
I discussed in more detail the problems with RMDs and the strategies to avoid them in the January 2020 issue. The IRS said that in the future it anticipated reviewing the life expectancy tables at the earlier of every 10 years or whenever a new study of individual annuity mortality is published.