New Life Expectancy Tables For Your Retirement Account

On November 7, 2019 the IRS issued Proposed Regulations revising life expectancy tables used to calculate minimum required distributions from retirement plans, such as IRAs.

That strikes me as a good thing. The tables have not been revised since 2002.

There are three tables that one might use, depending upon one’s situation. Let’s go over them:

The Uniform Lifetime Table

This is the old reliable and the one most of us are likely to use.

 Joint Life and Last Survivor Expectancy Table

This is more specialized. This table is for a married couple where the age difference between the spouses is greater than 10 years.

The Single Life Expectancy Table

Do not be confused: this table has nothing to do with someone being single. This is the table for inherited retirement accounts.

Let’s take a look at a five-year period for the Uniform Lifetime Table:

Age	Old	New	Difference
71	26.5	28.2	1.7
72	25.6	27.3	1.7
73	24.7	26.4	1.7
74	23.8	25.5	1.7
75	22.9	24.6	1.7

If you had a million dollars in the account, the difference in your required minimum distribution at age 71 would be $2,275.

It is not overwhelming, but let’s remember that the difference is for every remaining year of one’s life.

As an aside, I recently came across an interesting statistic. Did you know that 4 out of 5 Americans receiving retirement distributions are taking more than the minimum amount? For those – the vast majority of recipients – this revision to the life expectancy tables will have no impact.

Let’s spend a moment talking about the third table - the Single Life Expectancy Table. You may know this topic as a “stretch” IRA.

A stretch IRA is not a unique or different kind of IRA. All it means is that the owner died, and the account has passed to a beneficiary. Since minimum distributions are based on life expectancy, this raises an interesting question: whose life expectancy?

COMMENT: There is a difference on whether a spouse or a non-spouse inherits. It also matters whether the decedent reached age 70 ½ or not. It is a thicket of rules and exceptions. For the following discussion, let us presume a non-spouse inherits and the decedent was over age 70 ½.

An easy way to solve this issue would be to continue the same life expectancy table as the original owner of the account. The problem here is that – if the beneficiary is young enough – one would run out of table.

So let’s reset the table. We will use the beneficiary’s life expectancy.

And there you have the Single Life Expectancy Table.

As well as the opportunity for a stretch. How? By using someone much younger than the deceased. Grandkids, for example.

Say that a 35-year old inherits an account. What is the difference between the old and new life expectancy tables?

                                Old             48.5

                                New            50.5

Hey, it’s better than nothing and – again – it repeats every year.

There is an odd thing about using this table, if you have ever worked with a stretch IRA. For a regular IRA – e.g., you taking distributions from your own IRA – you look at the table to get a factor for your age in the distribution year. You then divide that factor into the December 31 IRA balance for the year preceding the distribution year to arrive at the required minimum amount.

Point is: you look at the table every year.

The stretch does not do that.

You look at the table one time. Say you inherit at age 34.  Your required minimum distribution begins the following year (I am making an assumption here, but let’s roll with it), when you are age 35. The factor is 48.5. When you are age 36, you subtract one from the factor (48.5 – 1.0 = 47.5) and use that new number for purposes of the calculation. The following year you again subtract one (47.5 – 1.0 = 46.5), and so on.

Under the Proposed Regulation you are to refer to the (new) Single Life Expectancy Table for that first year, take the new factor and then subtract as many “ones” as necessary to get to the beneficiary’s current age. It is confusing, methinks.

There are public comment procedures for Proposed Regulations, so there is a possibility the IRS will change something before the Regulations go final. Final will be year 2021.

So for 2020 we will use the existing tables, and for 2021 we will be using the new tables.

Dividing An Inherited IRA

We had a situation where a father left his IRA to his two children. The father was in his 70s, the son was in his 50s and the daughter in her 40s. The tax problem was triggered by having one IRA with two beneficiaries.

There are certain tax no-no's involving an IRA. One is to have your IRA go to your estate. An estate has no “actuarial life expectancy,” as only individuals can have life expectancies. Tax rules require an estate IRA to pay-out much sooner than may be desired or tax-advantageous. A second no-no is what the above father had done.

When there are multiple beneficiaries of an IRA, the IRS requires the IRA to calculate the minimum required distributions (MRD) based on the life of the oldest beneficiary. In our case, it wasn’t too bad, as the siblings were within 10 years of each other. Consider an alternate situation: a son/daughter and a grandchild. In that case the grandchild would be receiving MRDs based on the son/daughter’s life expectancy, which likely would not be in the grandchild’s best financial interest. 

What to do? Split the IRA into two: one for the son and another for the daughter. As long as this is done no later than the last day of the year following the year of death, the IRS will respect the division. This allows the son to use his life expectancy for his withdrawals, and the daughter to use her life expectancy.

 

The jargon for this is “subaccount,” and if you are in this situation (death in 2011), please consider dividing the inherited IRA into subaccounts by December 31.

By the way, there is a tax trap in setting up the subaccounts. These are inherited accounts, and the IRS requires inherited accounts to retain the name of the decedent. What do I mean? Say that Adam Jones passed way, so we would be looking at the “IRA FBO Adam Jones.” When the subaccounts are created, they should be named (something like) “IRA FBO Adam Jones Deceased FBO Benjamin Jones Inherited.” If one does not do this correctly, the IRS can (as has before) consider Benjamin as having withdrawn ALL the inherited IRA and put it into his own separate IRA. Since he withdrew all the inherited IRA, he has to pay tax on all of it, not just the minimum required distribution.

I consider the above tax trap to be unfair, but the IRS has brought down the hammer before. Do not be one of the unfortunate caught in this trap. We have discussed before that even an average person may need a tax pro here and there throughout life. This is one of those moments.