What the Proposed Change in RMDs Means for Investors

The amount retirees are required to withdraw from their retirement savings accounts may soon decrease. The Treasury Department released a proposal to revise the life expectancy tables. These tables determine the required minimum distribution (RMD) a retiree must take on an annual basis after they reach age 70½. Accounts subject to the RMD rule include traditional IRAs; SEP IRAs; SIMPLE IRAs; 401(k), 403(b) and 457 plan accounts; and Roth 401(k) accounts. Inherited IRAs are also subject to the RMD rules. Roth IRAs are notably excluded [which is why it makes sense to roll over a Roth 401(k) account to a Roth IRA].

The changes are being made because people are living longer. The existing tables used for determining RMDs were developed in 2002 using mortality rates for 2003. They are based on a 50%/50% split of life expectancies for men and women. An executive order in 2018 required the Treasury Department to determine if the tables should be revised. The updated estimates assume a 29.1-year life expectancy for a 70-year-old IRA owner versus the previous expectancy of 27.4 years. Additionally, the uniform life table will extend out to 120 years, up from 115 years now.

There are some details to be aware of and items of interest. I’ll get to those in a moment. Before I do, I want to point out that the proposed changes are intended to take effect in 2021. Until then, the existing tables will be in effect. The Treasury Department is seeking feedback on the changes through January 7, 2020. You can submit feedback at www.regulations.gov (indicate IRS and REG-132210-18). You can also mail in your comments. See the proposal in the Federal Register for information on how to do so.

Those who stick to the minimum withdrawal amounts would notice a decrease, but not a significant one. A 70-year-old retiree would see their RMD decrease from 3.65% of the account’s balance to 3.44% of the account’s balance. A 90-year-old retiree with $250,000 in their retirement account will be required to withdraw $20,661 (8.26% of the balance) under the proposed rules instead of $21,930 (8.77% of the balance) if the current rules were to stay in place. Relatively small savings, but still money retirees can keep in their accounts and continue growing on a tax-deferred basis [or tax-free in the case of a Roth 401(k)].

The transition is a bit more complicated for those turning 70½ in 2020 and for those who inherit an IRA prior to 2021 or already have inherited one.

A person who turns 70½ in 2020 will use the older tables to calculate their first RMD even if they delay taking their first RMD until April 1, 2021. This individual would then switch to the new tables for their 2021 distributions.

In the case of inherited IRAs, the rules are a bit trickier when the account owner has died prior to 2021. The Single Life Table will be switched to for distributions starting in 2021 with the initial life expectancy reduced by one for each year subsequent to the year for which it was initially set.

Here’s an example from the Treasury Department. An employee died at age 80 in 2018. Their designated beneficiary (who was not the employee’s spouse) was age 75 in 2018.

“For 2019, the distribution period that applies for the beneficiary is 12.7 years (the period applicable for a 76-year-old under the Single Life Table) … for 2020, it is 11.7 years (the original distribution period, reduced by one year). For 2021, taking into account the life expectancy tables under the proposed regulations and applying the transition rule, the applicable distribution period would be 12.0 years (the 14.0-year life expectancy for a 76-year-old under the Single Life Table in the proposed regulations, reduced by two years).”

In all cases, your broker or mutual fund company should automatically make the calculation change for you, but it would be a good idea to mark your calendar to follow up just to be sure.

Many retirees won’t be affected by the new rules. Just 20.5% of all individuals required to take an RMD take the minimum amount, according to the Treasury Department. Those of you following the 4% rule or a similar type of strategy may see your RMDs eventually exceed what your withdrawal strategy suggests. These changes may delay the crossover and will allow you to keep more in your retirement savings account when it does happen.

The rules are currently in a comment period, though they seem likely to go through since they are tied to an executive order. The Wall Street Journal reports that the Obama administration considered a similar update “but didn’t get to it before the administration ended.”

The aforementioned Federal Register entry provides more details and more examples of how the rules would apply.