New Tax Reduction For Some IRA Owners
It’s always nice to get a tax break. Starting in 2022 required minimum distributions (RMDs) by seniors from qualified retirement plans such as IRAs and 401(k)s will be reduced, courtesy of a change to life expectancies instituted by the IRS.
Here’s an example to illustrate the change. Suppose Mary Taxpayer, born on March 1, 1950, owns an IRA with a balance of $1 million as of December 31, 2021. Since she turns 72 in 2022 she will have to take her first RMD this year. The RMD amount is calculated by dividing the previous end of year balance by her current life expectancy in years which can be found in the IRS uniform life table. The life expectancy of a 72-year old taxpayer in the previous table was 25.6 years, which would have resulted in an RMD of $1,000,000 divided by 25.6, or $39,063. In the new table the life expectancy for age 72 increased to 27.4. So Mary’s RMD in 2022 will actually be only $36,496. Her taxable income in 2022 will consequently be $2,567 lower than it would have been before the change.
The new IRS uniform life table is not yet available in any IRS documentation but you can find it in the original legislation proposed in the Federal Register in 2020. Here’s the link: https://www.federalregister.gov/documents/2020/11/12/2020-24723/updated-life-expectancy-and-distribution-period-tables-used-for-purposes-of-determining-minimum#p-74.
The situation is more complicated when it comes to inherited IRAs. This tax benefit depends on whether or not you are an eligible designated beneficiary (EDB – don’t you love all the government acronyms). You are an EDB if the original owner died before January 1, 2020 OR if you’re disabled OR based on various other less common situations. An EDB gets to “reset” the RMD required for 2022 based on the new single life table: https://www.federalregister.gov/documents/2020/11/12/2020-24723/updated-life-expectancy-and-distribution-period-tables-used-for-purposes-of-determining-minimum#p-73. The life expectancy the EDB would use in 2023 would be the 2022 number reduced by 1, and so on for each subsequent year.
Surviving spouses are also EDBs and would use the above table unless they are more than ten years younger than their deceased spouse. In the latter case they would have to use the Joint & Last Survivor Table to calculate/reset their RMDs for 2022: https://www.federalregister.gov/documents/2020/11/12/2020-24723/updated-life-expectancy-and-distribution-period-tables-used-for-purposes-of-determining-minimum#p-75.
Inherited IRA beneficiaries who are not EDBs (e.g. if the original owner died in 2020 or later) have to follow a totally different rule instituted by the Secure Act. For them RMDs have been eliminated but the entire inherited IRA account must be liquidated within ten years.
Sounds complex? Of course it is! It’s a product of the federal government. But the life expectancy tables used by the IRS to calculate RMDs have not been updated since 2000 so this is certainly a welcome change. Ironically life expectancies used for the new tables – based on data from 2020 – have actually dropped since then because of COVID. Let’s hope the IRS doesn’t readjust them too soon.