What Revised Life Expectancy Tables Mean for You and Your Clients

Good news--the IRS is giving us all a little more life expectancy.

The IRS has just issued revised life expectancy tables for use in calculating required minimum distributions. Apparently, Americans are living longer, and the new tables reflect that fact. That means more deferral of your clients’ IRA and 401(k) distributions--for both retirees and beneficiaries.

The background: The Treasury promulgated the current actuarial tables we use for computing RMDs 16 years ago. Unlike the life expectancy tables used for gift and estate tax valuations (which must, by statute, be updated every 10 years), there is no required timetable for updating the retirement-related life expectancy tables. The IRS just does it once in a while--and that time has come.

The new tables are in the form of a proposed regulation issued in November 2019. Public hearings will be held in January 2020, and if the proposed regulation goes into effect as currently written, the new tables will be effective starting Jan. 1, 2021.

Three tables are affected: Reg. 1.401(a)(9)-9 contains the “Single Life Table” (used for determining payouts to beneficiaries from inherited retirement plans), “Uniform Lifetime Table” (used for determining lifetime RMDs to participants over age 70 1/2), and the “Joint and Last Survivor Table” (for lifetime payouts to any over-age-70-1/2 participant whose sole beneficiary is his or her more-than-10-years-younger spouse). Each of those will be replaced by an updated version because people are living, on average, almost two years longer than they did in 2003.

The impact on retirees and beneficiaries will be a measurable though usually modest reduction in RMDs. The larger the client’s retirement plan, the greater the dollar reduction in RMDs will be under the new tables. Of course, the income taxes on any amounts not distributed are still only deferred, not (for most people) eliminated, but clients like a lower immediate tax bill nevertheless.

Retiree Example: Alfred will turn 75 in 2020. The Dec. 31, 2019, value of his IRA is $2 million. Under the current Uniform Lifetime Table, which still applies through 2020, the divisor for age 75 is 22.9, so his 2020 RMD is $87,336. If the new tables were in effect, his divisor would be 24.6, and his RMD would be only $81,301. The $6,000 reduction could save (defer) over $2,000 of federal income tax for a 75-year-old with a $2 million IRA.

Beneficiary Example: Betty's mother dies in 2020, leaving her $1 million IRA to Betty as "designated beneficiary." Betty will turn 57 in 2021, the year after the year of her mother's death. Under the new single life table effective that year, her life expectancy ("divisor") will be 29.7 years, resulting in a $33,670 2021 RMD from the inherited IRA. Under the old tables (in use through 2020), her life expectancy would have been only 27.9 years, triggering an RMD of $35,842. Again, the new tables will produce a measurable though modest decrease in the RMD and current income tax.

The changeover to the new tables will be easy and painless for most people. Life expectancies that are recalculated annually (all lifetime payouts; postdeath payouts to a surviving spouse who was sole beneficiary) are easy as pie: Just recalculate using the new tables starting in 2021.

For beneficiaries of pre-2020 decedents who are taking RMDs using the fixed-term method over their single life expectancy, the switch in 2021 will be only slightly more complicated: There will be a one-time reset of the life expectancy that year. The designated beneficiary will go back to the year after the year of the participant’s death and find his or her (the beneficiary’s) single life expectancy as of his or her age in that year using the new table. Then, one year will be deducted from that new life expectancy for each year elapsed since the first distribution year to arrive at the divisor for the current post-2020 year.

Presumably, many participants and beneficiaries will get confused, use the wrong table, miscalculate the reset, and so on. But any such errors are likely to result in taking too much money out of the retirement plan rather than too little, so at least there will be no penalties triggered by any mistakes.

Although the new tables are pretty easy for retirees and beneficiaries to adapt to, there are classes of people for whom this change means a mountain of work, such as financial planners and plan administrators. Any financial plan done heretofore for a retirement plan owner or beneficiary will have to be redone to reflect the new tables--projections will change for RMDs, income taxes, liquidity needs, and potentially even Medicare premiums. And plan administrators will have to reprogram all their computers to recalculate RMD payouts and projections starting in 2021.

But most to be pitied are tax-book writers who will have to replace the tables, revise chapters, and rewrite every RMD example in their books. Some will probably decide to instead retire, leave all that work to others, and start collecting their own newly reduced RMDs.

Where to read more: For an explanation of the minimum distribution, see Chapter 1 of the author's book titled Life and Death Planning for Retirement Benefits (8th ed. 2019). For the new tables and their effective date, see Proposed Treasury Regulation 1.401(a)(9)-9.

Natalie Choate is an estate planning lawyer in Boston with Nutter McClennen & Fish LLP. Her practice is limited to consulting regarding retirement benefits. The new 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is now available through her website, www.ataxplan.com, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article may or may not reflect the views of Morningstar.