On November 7, 2019, the IRS proposed doing something that it had not done in nearly two decades…update the life expectancy tables used to calculate required minimum distributions by IRA, 401(k), other retirement account owners and many beneficiaries. More than a year later, on November 12, 2020, the IRS finalized those changes, and released updated versions of the Uniform Lifetime Table, the Single Life Table and the Joint and Last Survivor Table (the “Joint Table”).
Unfortunately, since the new tables were finalized so late in 2020, they were not applicable in the beginning of 2021 as scheduled. The IRS pushed off their effective date for an additional year to give custodians and other financial institutions time to implement the changes. Accordingly, 2022 is the first time that required minimum distributions (RMDs) are being calculated using the new tables.
RMDs are big deal for retirement account owners, and thus, the new tables have been subject to quite a bit of attention and fanfare. The reality, though, is that for most retirees and other retirement account owners, the new tables take a page out of Shakespeare and are “Much Ado About Nothing”.
1. Most People Take More Than The Required Minimum Distribution
According to information provided by the IRS in its 2019 Proposed Regulations on updated RMD tables, “Roughly 4.6 million individuals, or 20.5% of all individuals required to take RMDs from an affected retirement plan, will make withdrawals at the minimum required level in 2021.” In other words, only about one out of every five individuals subject to RMDs takes “just” the minimum amount. The rest, as it stands, take more.
If you’re taking more money out of your retirement account than you have to, it’s because you want to do so. Of course, “want” is somewhat relative. The reason many individuals take more than their RMD each year do so is because they “want” to pay their mortgage, or they “want” to eat, or they “want” to pay their credit card bill.
The reality, of course, is that these are all much more “needs” than they are “wants.” And that’s the point.
For individuals who have already been taking more than their RMD, lowering the minimum amount required to be distributed is unlikely to have much of an impact, if any, on the amount they choose to distribute. They will continue to need those larger-than-statutorily-required distributions. Food still needs to be put on the table. The mortgage still needs to be paid.
Thus, for roughly 80% of all retirement account owners, the new 2022 RMD tables are largely meaningless.
2. The New Tables Have A Minimal Impact On RMDs
While many retirees need to take larger-than-minimum distributions from their retirement accounts to meet living (and other) expenses, some are fortunate enough to have enough other income and/or assets such that they can “afford” to take only the minimum amount of their retirement accounts each year. Put differently, this is the (generally more affluent) group of individuals who will actually benefit from the new tables’ lower RMD amounts.
But by how much will they benefit?
The simple answer is “not very much.” The more complex answer is that the exact amount that an RMD differs under the new tables as compared to the old tables varies based on a retirement account owner’s age. Take, for instance, a 72-year-old IRA owner with a $1 million balance as of December 31, 2021.
Using this calculator, which illustrates the difference between an individual’s “old” and “new” RMD amounts, we can see that by using the new Uniform Lifetime Table (the table used by most owners to calculate their RMDs), such an individual’s 2022 RMD is about $2,567 less than it would have been in previous years. By contrast, using the same calculator, we see that an 85-year-old with the same $1 million prior-year-end balance would see a reduction in their RMD of roughly $5,067 for 2022.
Nominally, thousands of dollars aren’t anything to sneeze at, but $2,567 represents “just” 0.26% of a $1 million account. That’s not really going to move the needle very much. Over many years, the cumulative impact of lower annual RMDs may be more impactful, but that could have downsides of its own for some beneficiaries.
3. Smaller Lifetime Distributions Could Create A Bigger Problem For Some Beneficiaries
In December of 2019, the SECURE Act changed the distribution rules for most non-spouse beneficiaries of IRAs, 401(k)s and other retirement accounts. Instead of such beneficiaries “stretching” distributions over their life expectancy, most must now distribute the entire balance of the inherited account by the end of the 10th year after the owner’s death. Thus, whereas in the past, non-spouse beneficiaries often had the luxury of spreading out the income generated from an inherited retirement account over many decades. For the majority of such beneficiaries, the income is now compressed into a much shorter time span.
A shorter distribution period can result in larger distributions. In turn, those larger distribution can push beneficiaries into a higher tax bracket, phase them out of credits and/or deductions, increase their exposure to various surtaxes or trigger increases in other income-related costs (e.g., Medicare Part B/D premiums) – all of which have the effect of reducing the real value of the inherited account.
Simply put, the less an individual distributes from their IRA (or other retirement account) during their lifetime, the larger the retirement account balance will be upon their death. And the larger the IRA left behind, the more likely it is that a beneficiary will experience some of the negative tax impacts described above.
Ultimately, the good news about the new RMD tables for 2022 (and future years) is that there isn’t really any bad news. Those savers who need more than their RMD are welcome to continue taking larger-than-required distributions, while savers who want (and can afford) to take smaller distributions will be able to modestly reduce future RMDs.
For individuals who wish to reduce RMDs even further, additional strategies, such as Roth conversions, leveraging the still-working exception (must still be working and participate in an employer-sponsored retirement plan) and Qualified Charitable Distributions (QCDs) may be worth exploring.
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