SEE ADDITIONAL RMD OPTIONS UNDER THE CARES ACT (July 2020)
Taxpayers who have attained the age of 70½ must begin to consider taking distributions from qualified retirement plans, simplified employee pensions (SEPs), Simple IRAs and traditional “non-Roth” IRAs. A required minimum distribution (RMD) is the amount of money that must be withdrawn from a by owners of those plans. Under the rules, taxpayers must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70½.
These required minimum distributions are determined by dividing the retirement account’s prior year-end fair market value by the applicable distribution period or life expectancy. It should be noted that taxpayers meeting the age criteria are required to withdraw at least the required minimum distribution but may withdraw more than that amount.
The Internal Revenue Service has now proposed updated life expectancy and distribution period tables under the RMD rules. The tables reflect the general increase in life expectancy. As such, the revised tables work to extend the time period in which the amounts in the applicable plans can continue to grow on a tax deferred basis.
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. Thus, as noted above, they could leave 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)
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. As noted, RMDs apply to qualified plans, including 401(k) plans and profit sharing plans. They also apply to IRAs (including SEP and SIMPLE IRAs), inherited Roth IRAs, Tax Sheltered Annuity plans, and eligible deferred compensation plans.
In general, RMDs must begin for the year the individual reaches age 70 ½. 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 taxpayer’s lifetime (including year of death), the applicable distribution period is determined by the Uniform Lifetime Table. The figures in that table are the joint and last survivor life expectancy for the employee and a hypothetical beneficiary 10 years younger.
If a taxpayer’s sole beneficiary is his or her surviving spouse and the spouse is more than 10 years younger than the taxpayer, the applicable distribution period is the joint and last survivor life expectancy of the taxpayer and spouse under the Joint and Last Survivor Table.
After the taxpayer’s death, the distribution period is generally based on the designated beneficiary’s age using the Single Life Expectancy Table.
Proposed Tables
The life expectancy tables and applicable distribution period tables in the proposed regulations 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 Date of Applicability
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 1/2 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.
Public Hearing Requirements
It should noted that the rules set forth above and the revisions included therein have been issued in the form of proposed Treasury regulations which require public input prior to finalization. To this end, 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.
Concluding Remarks
The RMD rules are intended to minimize the tax deferral period associated with taxpayers holding retirement wealth in the applicable plans. By forcing the distributions in this way, the Internal Revenue Service is able to better match the deferral opportunity with the life span of the plan beneficiary/taxpayer.
Planning for use of qualified plan funds that have an income tax deferral opportunity requires careful planning to optimize the use of these funds and to ensure that the economic impact associated with these plans is fully realized.
Questions and comments can be submitted to Bob Grossman or Don Johnston.
