The rules for required minimum distributions (RMD) can be challenging to navigate. New regulations that update the life expectancy tables to be used add another layer of complexity. The switch to those new tables can be simple for some taxpayers and more complex for others. CPAs are in a unique position to help those taxpayers take advantage of the new final regulations.

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The New Regulations

In accordance with Executive Order 13847, the Treasury Department and the IRS examined the life expectancy and distribution period tables in Treasury Regulations section 1.401(a)(9)-9 and determined that those tables should be updated to reflect current life expectancies. The final regulations were published in the Federal Register on November 12, 2020, and are effective for distribution calendar years beginning on or after January 1, 2022. A distribution calendar year is a calendar year for which an RMD is required.

In order to reflect a longer life expectancy, the tables provide a larger divisor, which produces a smaller RMD; this allows retirees to retain more retirement savings in their accounts for their later years. The current tables in section 1.401(a)(9)-9 were issued nearly 20 years ago; these will no longer apply.

For many taxpayers, the switch will be simple. Consider the example of Ralph, who was born July 15, 1950, and has a traditional IRA with a fair market value of $1,000,000 on 12/31/2021. In the distribution calendar year 2022, Ralph will be 72 years old. Under the old uniform lifetime table, for a 72-year-old, the life expectancy factor was 25.6, and his RMD would be $39,063 ($1,000,000/25.6). The new uniform lifetime table provides a life expectancy of 27.4, resulting in a smaller RMD of $36,496 ($1,000,000/27.4). For IRA owners, the switch is straightforward: they will just reference the new table. The process is more involved for taxpayers who inherited these accounts, which will be discussed further below.

The Secure Act of 2019 (Setting Every Community Up for Retirement Enhancement) increased the age to start taking RMDs from 70½ to 72. The required beginning date (RBD) is now April 1 of the calendar year following the later of either (1) the calendar year in which the employee (IRA owner) attains age 72, or (2) the calendar year in which the employee retires (excluding IRAs or employees who own more than 5% of the company maintaining the plan). The increased age of 72 applies to those who would have attained age 70½ after December 31, 2019 [Secure Act, P.L. 116-94, section 114(d)]. In other words, the increased age of 72 is applicable to those born on or after July 1, 1949.

In the previous example, if Ralph were born just one year earlier (July 15, 1949), he would reference the old table for just one year, 2021. He would be subject to RMDs when he turns 72 in 2021. The RMD for the distribution calendar year 2021 can be taken as late as April 1, 2022. The effective/applicability date in the preamble to these final regulations confirms that the new tables do not apply to the 2021 distribution calendar year (which is due April 1, 2022), but will apply to the 2022 distribution calendar year (which is due December 31, 2022).

The new regulations include a transition rule for employees/IRA owners who died prior to January 1, 2022. Under the transition rule, the initial life expectancy used to determine the distribution period is reset by using the new single life table in the regulations. It should be noted that this is a one-time reset and the transition rule can apply in three situations:

  • The employee (or IRA owner) died with a nonspousal eligible designated beneficiary.
  • The employee (or IRA owner) died after the RBD without a designated beneficiary.
  • The employee (or IRA owner) died after the RBD and is younger than the designated beneficiary.

The process is more involved for taxpayers who inherited these accounts.

Died with a Nonspousal Eligible Designated Beneficiary

This is probably the most common situation that tax advisors will encounter. In 2019, the Secure Act introduced the term “eligible designated beneficiary” (EDB). With respect to individuals who die after December 31, 2019, only EDBs may use the life expectancy method. Designated beneficiaries who are not EDBs must distribute their entire interest in the account within 10 years after the death of such employee/IRA owner. EDBs include the following:

  • Surviving spouse
  • Child of the employee/IRA owner who has not reached the age of majority
  • Disabled beneficiary [within the meaning of IRC section 72(m)(7)]
  • Chronically ill beneficiary [within the meaning of IRC section 7702B(c)(2)]
  • Individual who is not more than 10 years younger than the employee/IRA owner.

The stretch IRA is now generally limited to only the individuals listed above; the Secure Act, however, provided an exception for certain beneficiaries. If an individual died before the effective date of January 1, 2020, the designated beneficiary shall be treated as an EDB. These beneficiaries are grandfathered under the old rules and can continue to use their own life expectancy factor. An individual who was the designated beneficiary of an IRA whose owner died prior to 2020 would calculate RMDs based on their own life expectancy, as provided under the pre–Secure Act rules. Once the original designated beneficiary dies, however, the new 10-year rule would kick in for any successor beneficiary.

In general, if an employee (or IRA owner) dies after the RBD, in the year following the death, the designated beneficiary can calculate the RMD using the designated beneficiary’s life expectancy on the single life table. The designated beneficiary’s life expectancy is measured using the beneficiary’s age as of the beneficiary’s birthday in the calendar year immediately following the calendar year in which the individual died. In subsequent calendar years, the applicable distribution factor (life expectancy factor) is reduced by one for each calendar year that has elapsed after the calendar year immediately following the calendar year of the individual’s death [see Treasury Regulations section 1.401(a)(9)-5, Q&A-5(c)(1)]. The new regulations will require a one-time reset; this is better understood with an example.

Example. Clark was born June 30, 1945; he passed away December 2019 at age 74, prior to the Secure Act’s EDB rule. On December 31, 2019, Clark’s IRA was valued at $1,000,000, and he designated his daughter, Audrey, as beneficiary of 100% of the IRA. Audrey attained age 33 in 2020 and has a life expectancy from the single life table of 50.4; her 2020 RMD would be $19,841 ($1,000,000/50.4). In subsequent years, the life expectancy factors would be reduced by 1.0—for example, 49.4 for 2021 (50.4, 1 yr), 48.4 for 2022 (50.4, 2 yr), and so on.

Under the updated single life table for a 33-year-old, Audrey’s initial life expectancy factor receives a one-time reset from 50.4 to 52.5. For 2022, she will take the new initial factor of 52.5 and reduce it by the two calendar years (2021 and 2022) that will elapse after 2020. Her life expectancy factors would adjust as follows: 50.5 for 2022 (52.5, 2 yr), 49.5 for 2023 (52.5, 3 yr), and so on.

Those taxpayers who can still benefit from the “stretch” will also want to minimize their income tax by confirming that their adjusted life expectancy factor for the years 2022 and, thereafter, has been increased by the one-time reset.

Died after the RBD without a Designated Beneficiary

If an employee (or IRA owner) dies after the RBD and no beneficiary is designated, the distribution period (life expectancy factor) is over the employee’s life expectancy using the single life table. This generally happens when the IRA owner designates a charity, his estate, or a trust that does not qualify as a “see-through trust.” Under these circumstances, the applicable distribution period is measured by the individual’s birthday in the calendar year of death. In subsequent years, the applicable distribution period is reduced by one for each calendar year that has elapsed after the calendar year of the individual’s death [see Treasury Regulations section 1.401(a) (9)-5, Q&A-5(a)(2)]. This is sometimes referred to as the “ghost” life expectancy rule. These situations will require a one-time reset as well.

Those taxpayers who can still benefit from the “stretch” will also want to minimize their income tax by confirming that their adjusted life expectancy factor for the years 2022 and, thereafter, has been increased by the one-time reset.

Died after the RBD and Is Younger than the Designated Beneficiary

If an employee (or IRA owner) dies after the RBD, the designated beneficiary’s distribution period will be over the longer of: the life expectancy of the designated beneficiary, or the life expectancy of the employee (IRA owner). In the example above, Clark’s daughter Audrey took distributions over her own life expectancy. Had Clark left the IRA to his older brother Joseph, however, he could have used his younger brother’s life expectancy. This rule is in place to ensure that the designated beneficiary (Joseph) has a choice and is not worse off because there is no designated beneficiary under the “ghost” life expectancy rules [see Treasury Regulations section 1.401(a)(9)-5, Q&A-5(a)(1)]. If the example was changed so that Clark’s older brother was the designated beneficiary, Joseph would do a one-time reset in 2022, which would adjust the subsequent life expectancy factors.

Series of Substantially Equal Periodic Payments

There is an exception to the 10% early withdrawal penalty (which applies to distributions made before reaching age 59½) under IRC section 72(t)(2) (A)(iv) for a series of substantially equal periodic payments. The application of the final regulations will not be treated as a modification to a series of substantially equal periodic payments. It appears that taxpayers will need to change the amortization/annuitization method they were using under section 2.01(b) or (c) of Revenue Ruling 2002-62. At the date of this writing, the Treasury Department and the IRS anticipate issuing guidance that would update Revenue Ruling 2002-62.

Guiding Taxpayers

For taxpayers, the transition to the new tables will be very simple. As detailed above, however, there is a bit more legwork under certain circumstances. Fortunately, tax professionals will be there in 2022 to help guide taxpayers through the new regulations.

David M. Barral, CPA/PFS, CFP, MST is a vice president and wealth advisor at The Northern Trust Company, New York, N.Y.