Qualified retirement plans are required to provide that the plan will commence required minimum distributions (RMDs) of plan benefits when a participant attains age 70½, as calculated over the life of the plan participant, or over the lives of the participant and a designated beneficiary, as applicable. These rules also apply to IRAs, IRA account owners, and their beneficiaries, and certain other tax-favored employer-provided retirement arrangements.
Plan administrators use the life expectancy and distribution period tables set forth in Regulation section 1.401(a)(9)-9 to calculate RMDs. The purpose of the RMD rule is to limit the period of deferral of retirement income by requiring individuals to take distributions from their retirement plans over their life expectancies, starting at age 70½.
In August 2018, the White House issued Executive Order 13847 which directed the Secretary of the Treasury to determine whether it should update the life expectancy and distribution period tables in the regulations on RMDs to reflect current mortality data. In accordance with the Executive Order, the Treasury Department and IRS examined the tables and issued proposed regulations (REG-132210-18) to take into account longer life expectancies. Overall, the updated life expectancy and applicable distribution period tables are intended to allow participants to decrease the amount of their required minimum distributions and thereby increase the amounts retained in their retirement plans to account for the possibility they may live longer. The comment period for the proposed regulations, including the updated tables, closes on Jan. 7, 2020.
If finalized, the proposed regulations would allow individuals who currently receive RMD amounts from their retirement plans to lessen the amount of their RMD amounts. These proposed regulations would not affect individuals who withdraw more than the current RMD rules require. IRA providers and employer-provided retirement plans (other than plans that pay only lump sums) would have to update the administration of their plans to reflect the updated life expectancy tables.
Specifically, the Uniform Lifetime Table and Distribution Period Tables under the proposed regulations would apply for distribution calendar years beginning on or after Jan. 1, 2021. For example, if an individual turns 70½ (the age in which affected retirement account owners must begin taking distributions) in 2020 the proposed regulations would not apply to the RMD for the individual’s 2020 distribution calendar year but would apply to the RMDs for the individual’s 2021 distribution calendar year.
Additionally, the proposed regulations would provide a transition rule that applies to individuals who die prior to Jan. 1, 2021. Under the transition rule, in certain circumstances, the initial life expectancy used to determine the RMD distribution period would be reset by using the updated Single Life Table for determining the age of the relevant individual in the calendar year for which life expectancy was determined. For distribution calendar years beginning on or after Jan. 1, 2021, the distribution period would be determined by reducing that initial life expectancy by one for each year subsequent to the year for which it was initially determined.
This transition rule applies in three situations:
- The individual died before the individual’s required beginning date with a non-spouse designated beneficiary (so that the applicable distribution period is determined based on the remaining life expectancy of the designated beneficiary for the calendar year following the calendar year of the individual’s death);
- The individual died after the required beginning date without a designated beneficiary (so that the applicable distribution period is determined based on the remaining life expectancy of the individual for the year of the individual's death); and
- The individual, who is younger than the designated beneficiary, died after the required beginning date (so that the applicable distribution period is determined based on the remaining life expectancy of the individual as determined for the year of the individual’s death).
If finalized, these proposed regulations would also provide a planning opportunity to individuals who are taking pre-age 59½ 'substantially equal periodic payments' (often referred to as section 72(t) distributions). Under these section 72(t) distribution rules and the guidance in Rev. Rul. 2002-62, individuals can avoid the 10% penalty applicable to pre-59½ distributions from the plan, if they receive such distributions on a substantially equal periodic basis, provided that the stream is not subsequently modified. In determining whether distribution payments are substantially equal, the section 72(t) distribution guidance refers to the existing RMD tables. The proposed regulations would provide that switching to the updated tables is not a modification to the stream of substantially equal payments.