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Here's how the new IRS life expectancy tables affected inherited and owner retirement accounts

Posted by Gayla K. Austin | Jan 20, 2022 | 0 Comments

For beneficiaries of inherited accounts who already are taking Required Minimum Distributions, you get a one-time reset to take advantage of new life expectancy tables. 

Starting this year, new IRS life expectancy tables--which are used to determined the required distributions--are in effect.  There are a couple of situations that will only happen this year.  

Required minimum distributions apply to 401(k) plans--both traditional and the Roth version--and similar workplace plans, as well as most individual retirement accounts.  Roth IRAs have no required withdrawals until after the account owner's death.  

Before the Secure Act taking effect in 2020, required minimum distributions were generally required once a person hit 70 and 1/2.  Now, for anyone that reached that age in 2020, or after, required minimum distributions kick in at age 72.  In other words, if you were born July 1, 1949, or later, you can wait until age 72. 

The amount you must withdraw each year is generally determined by dividing the previous year end balance of each qualifying account by a "life expectancy factor" as defined by the IRS.  The agency's new tables assume you will live longer, which may have the effect of reducing the amount you need to withdraw.  

New Uniform Life Table

Under the new uniform life table, for example, a 75-year old would use 24.6 as their factor.  If the account balance is, say $500,000, dividing the amount by that factor results in a required minimum distribution of about $20,325.00.  

Under the old table, the factor for a 75-year old was 22.9 or $21,834.00 for a $500,000 account. 

One thing to be careful about involves anyone who turned 72 in the second half of last year.  Someone reaching that age in the first half of 2021 would have been subject to the required minimum distribution age of 70 and 1/2.  

Basically, in a person's first year of required minimum distributions, that required withdrawal can be delay up until April 1 of the following year, although this means having two required minimum distributions in the same year.   If you delayed your 2021 required minimum distribution to take advantage of that rule, be sure to use the proper account balances and the proper life expectancy table.  

That is, your 2021 required minimum distribution would be based on the old life expectancy tables and the account's balance on December 31, 2020.  Your 2022 required minimum distribution would be based on the new tables and the balance at the end of 2021.  

Inherited retirement accounts 

For inherited IRAs, calculating required minimum distribution is handled differently.  

The Secure Act eliminated the ability of most beneficiaries to stretch out withdrawals across their own lifetime--the so-called stretch IRS--if the original account owner died in 2020 or later.  

Now, unless they meet an exception, beneficiaries are required to withdraw all assets from the inherited account by December 31 of the 10th year following the account owner's death. 

Exceptions to that rule include when the beneficiary is a surviving spouse; a minor child of the account owner, until they reach the age of majority, which is usually 18; a disabled beneficiary or one who is not more than 10 years younger than the original account owner.  These beneficiaries can still stretch out payments based on their life expectancy.  

Beneficiaries who had an inherited account before 2020 and were using the stretch provision can continue to do so. 

Either way, the method for determining your required minimum distribution from an inherited account is different and spouses have several options.  In the first year, you look at the factor for your age in the single life table.  In the next year you reduce that original factor by one and then continue subtracting one in each subsequent year. 

It's a one time reset . . . . 

This year, you get a one time reset:  Look at the factor in the single life table for the age you were when you began taking those required minimum distributions and reduce that number by one for reach year that has passed.  It's looking at it as if the new table was in effect when you inherited the account.  But it doesn't affect the required minimum distributions you've taken since then.  Once you do the reset, you continue reducing your factor by one each year. 

About the Author

Gayla K. Austin

I enjoy helping clients put it all together with legal advice regarding real property, estate planning and business entities.


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