It’s a tiny little gift from the IRS, but it’s still a gift. Beginning January 1, 2022, Required Minimum Distributions on IRAs, qualified retirement plans, and annuities will be less. It’s your reward for living longer.
RMDs have to be taken by people turning age 72 after 2019. Older taxpayers were required to begin RMDs the year after they turned 70 ½. How much they were required to take was based on life expectancy tables that had been in place at the IRS for a long time.
But people are living longer and the life expectancy tables were out-of-date. In November 2019, the IRS issued proposed regulation changes which included updated life expectancy tables. The final version was released in 2020. But because IRA custodians and retirement plan sponsors need time to update their systems, the new regulations begin at the beginning of 2022 using mortality rates expected for 2022.
The current life expectancy tables predict a 70-year old will live 27.4 years. The new tables anticipate that same 70-year old to live 29.1 years. When the proposed regulations were issued, the IRS estimated that the new tables would cause IRA balances to increase by 1% by the time a taxpayer reached 90 years old.
According to Bob Carlson, editor of Retirement Watch, RMDs are a negative factor for IRA owners who have other income and assets that can be used to maintain their standards of living. Taking RMDs from their traditional IRAs increases their taxable income and income taxes. The RMDs also increase adjusted gross income, which can cause increases in the amount of Social Security benefits that are taxed and the Medicare premium surtax (also known as IRMAA). RMDs also can trigger increases in other taxes or decreases in tax benefits.
Carlson points out that under the life expectancy tables, the percentage of the IRA that must be distributed each year increases. So, the tax problems of RMDs can increase over time. That’s why IRA owners who have sufficient income and assets outside their IRAs should consider strategies to reduce future RMDs. They can convert a traditional IRA to a Roth IRA. Or they can take distributions from the IRAs before they are required to and pay the taxes at today’s rates. The after-tax amount can be used to fund life insurance payable to their children, make gifts to their children or other loved ones, or invest in taxable accounts that can be inherited by their children.
Given the increasing longevity of Americans, the IRS, going forward, plans to review the life expectancy tables every 10 years or whenever a new study of individual annuity mortality is published, whichever occurs first.