New IRS Life Expectancy Tables Will Impact Many Federal Employees and Retirees on Jan. 1, 2022

January 17, 2022

Do You Feel Younger?

Well, the IRS thinks you do.

If you are taking a Required Minimum Distribution (RMD) from a retirement plan in 2022, you should know that the tables used to calculate your distributions have been adjusted.

Edward A. Zurndorfer of MyFederalRetirement.com helps provide a better understanding of the impact of this change.

ARTICLE HIGHLIGHTS:

New IRS Life Expectancy Tables Will Impact Many Federal Employees and Retirees on Jan. 1, 2022

A little over one year ago in November 2020, the IRS proposed new life expectancy tables for calculating required minimum distributions (RMDs) from IRA and employer -sponsored retirement plans including the Thrift Savings Plan (TSP).

After more than a year of waiting for the new tables to take effect, the tables will go into effect on Jan. 1, 2022. The new tables will impact many federal employees and retirees. This column discusses these impacts.

The Three New Life Expectancy Tables

Federal employees and retirees who are required to take annual RMDs for one reason one or another will be affected by the new life expectancy tables. This includes employees and retirees who are taking lifetime RMDs from an inherited IRA, employees over age 72 taking RMDs from their own traditional IRAs, and federal retirees who must take RMDs from their TSP accounts, their own traditional IRAs and qualified retirement plans they may have previously participated in.

It is important for employees and retirees to understand that while most IRA custodians and employer-sponsored retirement plan administrators (including the TSP) should automatically implement the new tables, it is important for employees and custodians to understand how the changes will affect their RMDs. This is because while an IRA custodian or a retirement plan administrator usually calculates an RMD, the IRA custodian or plan administrator could calculate the RMD incorrectly.

It is the responsibility of the IRA owner and retirement plan participant to take the proper amount of the annual RMD. An incorrectly calculated RMD (that is below what it should be) could result in the IRA owner/retirement plan participant being subject to an IRS “excess accumulation” penalty.

The following three IRS life expectancy tables were revised and viewed here . The three tables will appear in the 2021 IRS Publication 590-B (Distributions from Individual Retirement Arrangements), which should be available for download at www.irs.gov in early 2022:

1. Uniform Lifetime Table (a portion of the revised table is presented below). This table is used to calculate lifetime RMDs for an account owner’s own IRA or retirement plan participation, including the TSP.

2. Joint and Last Survivor Life Expectancy Table. This table is used when a spouse is the sole IRA or qualified retirement plan beneficiary and that spouse is more than 10 years younger than the IRS owner or retirement plan participant, including the TSP.

3. Single Life Expectancy Table (a portion of the revised appears below). Under the SECURE Act, this table is only used to calculate post-death RMDs for “eligible designated beneficiaries.” This includes a surviving spouse, minor child of the IRA owner, chronically ill or disabled individual, and those individuals who are not more than 10 years younger than the IRA account owner. The single life expectancy table is also used if an IRA owner dies after the required beginning date (RBD) without naming a living beneficiary.

The RBD is April 1 of the year following the year the IRA owner becomes age 72 (if born after June 30,1949 or age 70.5 if born before July 1, 1949). The single life expectancy table is used to calculate RMDs from inherited IRAs for beneficiaries who inherited IRAs prior to the passage of the SECURE Act which became effective Jan. 1, 2020.

Note that the Single Life table is never used by traditional IRA owners or retirement plan participants, including TSP participants, to calculate their RMDs.

Examples of Taking RMDs Based on the Uniform Lifetime Table (Pre-2022 and Post-2021 Tables)

Since the easiest change to implement is for traditional IRA owners, qualified retirement plan owners and TSP participants who are taking lifetime RMDs based on the Uniform Lifetime Table, some examples will be presented using both the current (pre-2022) and new (post-2021) Uniform Lifetime Tables.

The Uniform Lifetime Table is a “recalculating” table in the sense that a traditional IRA owner or retirement plan participant will go back each year to the table to locate his or her age that year and corresponding life expectancy factor. This new number factor is then divided into the December 31 account balance from the previous year to compute the RMD.

It should be noted that in spite of the recent decrease in overall life expectancy due to the COVID-19 pandemic, on average life expectancies have increased. This is why the IRS updated the life expectancy tables. While the new tables do not reflect substantial changes, the changes will result in reduced RMDs for almost all individuals, a result of larger life expectancy factors.

Reduced RMDs are good news for retired TSP participants who will soon be reaching their required beginning dates and who will therefore start taking their TSP RMDs.

The following is a portion of the Uniform Lifetime Table, both the pre-2022 table and the post-2021 table:

Uniform Lifetime Table*


Two examples illustrate use of the pre-2022 Uniform Lifetime table and the post-2021 Uniform Lifetime table.

Note that as illustrated below in Example 2, for those traditional IRA owners who became age 72 anytime during 2021, there is an added layer of complexity.

Example 1. Kevin became age 73 in 2021 and is required to take RMDs from his traditional IRA. For 2021, Kevin uses his age during 2021 (73) and the applicable life expectancy factor (24.7) from the current (pre-2022) Uniform Lifetime table to calculate his RMD. If Kevin’s traditional IRA balance as of 12/31/2020, was $250,000, then Kevin’s traditional IRA RMD for the year 2021 will be calculated as follows:

$250,000/24.7 = $10,121

During 2022 when Kevin becomes age 74, he will use the post-2021 Uniform Lifetime table to calculate his 2022 traditional IRA RMD. The life expectancy for a 74-yearold in the post-2021 Uniform Lifetime table is 25.5. At age 74, the new table gives Kevin an additional 1.7 years versus the age 74 life expectancy factor (23.8) using the old table.

For those traditional IRA owners or TSP participants who retired before 2021 or retired sometime during 2021, and who become age 72 during 2021, there is a potential added layer of complexity. These individuals have their first RMD (a separate RMD for the IRA and the TSP) for the year 2021.

The added layer of complexity is because the first RMD is permitted to be delayed and taken any time between January 1 and March 31, 2022. Any individual who delays their first year RMD to the following year must take two RMDs in that following year – one for the current year (in this case 2021) and one for the next year (in this case 2022). This means that traditional IRA owners and retired TSP participants becoming age 72 during 2021 having to take two RMDs during 2022 – one using the pre-2022 Uniform Lifetime table (for the 2021 RMD) and one using the post -2021 Uniform Lifetime table (for the 2022 RMD). The following example illustrates:

Example 2. Sylvia became age 72 on Oct. 1, 2021. She is a federal employee with a traditional IRA. Since Sylvia became age 72 during 2021, she must take her first traditional IRA RMD. She is allowed to delay taking it until April 1, 2022, before March 31, 2022. Sylvia uses the pre-2022 Uniform Lifetime Table to calculate her 2021 traditional IRA RMD. She looks up her age in 2021 (72) and identifies the corresponding factor (25.6) and divides it into her Dec. 31, 2020 traditional IRA balance of $375,000. Her 2021 traditional IRA RMD is therefore:

$375,000/25.6 = $14,648

Sylvia must also take her 2022 traditional IRA RMD before Dec. 31, 2022. Sylvia will become age 73 during 2022. She uses the post-2021 Uniform Lifetime Table to calculate her 2022 RMD. The life expectancy factor for age 73 in the post-2021 Uniform Lifetime factor is 26.5 which is 1.8 years more than the age 73 life expectancy factor (24.7) using the pre-2022 Uniform Lifetime factor.

Sylvia will divide the 26.5 factor into her Dec. 31, 2021 traditional IRA balance to compute her 2022 traditional IRA RMD. Both the 2021 and 2022 traditional IRA RMDs taken during 2022 will be taxable income to Sylvia for the year 2022.

Examples of Taking RMDs Based on the Single Life Expectancy Table (pre-2022 and post-2021 tables)

The Single Life table is used by individuals (designated beneficiaries) who inherited IRAs (traditional or Roth) before 2020 or by eligible designated beneficiaries (EDBs) who inherited IRAs after Dec. 31, 2019. EDBs include a spouse, a disabled individual, and any individual who is not more than 10 years younger than the deceased IRA owner. The beneficiary uses the life expectancy factor for his or her age attained in the year after the death of the IRA owner. For non-spousal beneficiaries, this is the only time the beneficiary will use the Single Life table. this is because non-spousal beneficiaries cannot recalculate in future years. In future years, the initial life expectancy factor (in the year after the death of the original IRA owner) is automatically reduced by one of each succeeding year.

The following table is a portion of the Single Life table, both pre-2020 and post-2021.

Single Life Expectancy Table (for Inherited IRAs)*


The following example illustrates the use of the Single Life Expectancy Table:

Example 3. In 2016, Rachel’s grandmother died, and Rachel was the designated beneficiary of her grandmother’s traditional IRA. Rachel’s first beneficiary RMD was for 2017 when Rachel was 30 years old. Rachel had the option of receiving her grandmother’s IRA distributed over her life expectancy. This is because Rachel inherited her grandmother’s IRA before Jan. 1,2020 (which was pre-SECURE Act) and she was allowed to receive inherited IRA payments over her life expectancy, starting in the year after her grandmother’s death; that is, starting in 2017.

Rachel used the Single Life Expectancy table (pre-2022) for a 30-year-old, which is 53.3. She divided 53.3 into the inherited traditional IRA balance as of December 31, 2016 to compute her 2017 RMD.

Since Rachel is a non-spousal beneficiary, she cannot recalculate her life expectancy from the Single Life Expectancy table. Instead, each year she simply subtracts 1 from the previous year’s factor. In 2018 her life expectancy factor is 52.3. In 2019, her factor is 51.3.

Rachel has been diligently taking RMDs from her inherited traditional IRA each year, except for the year 2020 in which no RMD was taken, a result of the CARES Act passage. However, the minus one (-1) math was still in effect. Five years after inheriting her grandmother’s traditional IRA, Rachel’s life expectancy factor for 2021 is 49.3. But starting Jan. 1, 2022, the Single Life Expectancy table changes. To properly calculate her 2022 RMD and to reset her non-recalculation schedule, Rachel must use the post-2021 Single Life Expectancy table and look up her age for the year that she first started taking her RMDs. In the post-2021 table, the life expectancy for a 30-year-old is 55.3. Rachel will need to subtract five years – 55.3 less 5 or 50.3, as her new baseline in 2022, rather than the 48.3 factor she would have used without resetting the factor. She will subtract 1 each year going forward.

AUTHOR:
Edward A. Zurndorfer, Certified Financial Planner
MyFederalRetirement.com - December 14, 2021