By Pension and Benefits Editorial Staff
The IRS has issued proposed regulations that update life expectancy and distribution period tables that are used to calculate required minimum distributions (RMDs) from defined contributions plans and individual retirement accounts. The tables reflect the general increase in life expectancy. The proposed tables would apply for distribution calendar years beginning on or after January 1, 2021, with transition relief.
Effect of proposed tables. Distribution periods under the new rules would generally increase between one and two years. Retirees and beneficiaries would be able to withdraw slightly smaller amounts from their plans each year. They could leave larger amounts in tax-favored retirement accounts for a slightly longer period of time, to account for the possibility that they may live longer.
Required minimum distributions. RMDs ensure that the favorable tax treatment for a retirement plan is used primarily to provide retirement income rather than to increase the participant’s estate. RMDs apply to qualified plans, including 401(k) plans and profit sharing plans. They also apply to IRAs (including SEP and SIMPLE IRAs), tax sheltered annuity plans, and eligible deferred compensation plans.
In general, RMDs must begin for the year the individual reaches age 70 Â½. An RMD for a calendar year is determined by dividing the participant’s account balance by the applicable distribution period. Distribution periods are based on life expectancies. They are found in one of three tables, depending on the circumstances.
RMD tables for lifetimes and distribution periods. During the employee’s lifetime (including the year of death), the applicable distribution period is determined by the Uniform Lifetime Table if the employee’s surviving spouse is not the sole designated beneficiary. The figures in that table are the joint and last survivor life expectancy for the employee and a hypothetical beneficiary 10 years younger.
If an employee’s sole beneficiary is the employee’s surviving spouse and the spouse is more than 10 years younger than the employee, then the applicable distribution period is the joint and last survivor life expectancy of the employee and spouse under the Joint and Last Survivor Table.
After the employee’s death, the distribution period is generally based on the designated beneficiary’s age using the Single Life Expectancy Table.
Proposed tables. The existing life expectancy tables and applicable distribution period tables were developed using mortality rates for 2003. The updated tables in the proposed regulations have been developed based on mortality rates for 2021 and reflect longer life expectancies than the tables in the existing regulations.
Example. A 70-year old IRA owner who uses the existing Uniform Lifetime Table to calculate required minimum distributions must use a life expectancy of 27.4 years. Using the proposed Uniform Lifetime Table, this IRA owner would use a life expectancy of 29.1 years to calculate required minimum distributions.
Example. A 75-year old surviving spouse who is the employee’s sole beneficiary and uses the existing Single Life Table to compute required minimum distributions must use a life expectancy of 13.4 years. Under the proposed table, the spouse would use a life expectancy of 14.8 years.
Proposed applicability date. The life expectancy tables and Uniform Lifetime Table under these proposed regulations would apply for distribution calendar years beginning on or after January 1, 2021. For example, for an individual who attains age 70 Â½ during 2020 (so that the minimum required distribution for the distribution calendar year 2020 is due April 1, 2021), the final regulations would not apply to the minimum required distribution for the individual’s 2020 distribution calendar year (which is due April 1, 2021), but would apply to the minimum required distribution for the individual’s 2021 distribution calendar year (which is due December 31, 2021).
These proposed regulations include a transition rule that applies if an employee died before January 1, 2021, and the distribution period that applies for calendar years following the calendar year of the employee’s death is equal to a single life expectancy calculated as of the calendar year of the employee’s death (or if applicable, the year after the employee’s death), reduced by one for each subsequent year. Under this transition rule, the initial life expectancy used to determine the distribution period is reset by using the new Single Life Table for the age of the relevant individual in the calendar year for which life expectancy was set. For distribution calendar years beginning on or after January 1, 2021, the distribution period is determined by reducing that initial life expectancy by one for each year subsequent to the year for which it was initially set.
Hearing and comments. A public hearing on these proposed regulations has been scheduled for January 23, 2020, beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224. Written or electronic comments must be received by January 7, 2020. Consideration will be given to any comments that are submitted timely to the Treasury Department and the IRS. The Treasury Department and the IRS request comments on all aspects of these proposed regulations, including: how often the life expectancy and distribution period tables in these regulations should be updated; the extent of the administrative burden involved in implementing any such updates; whether guidance is needed so that a participant whose plan administrator or trustee fails to implement the final regulations in a timely fashion may take required minimum distributions (or roll over distributions in excess of the required minimum distribution) in a manner that takes into account the final regulations.
Source: 84 FR 60812.
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