Starting January 1, 2022, the life expectancy tables used to calculate SEPP 72t Plan distributions will be updated. The IRS has updated the tables to increase life expectancies by about 1-3 years, depending on your current age.
Summary of Changes:
- The new life expectancy tables will go into effect January 1, 2022.
- The updated tables reflect longer life expectancies than current tables.
- The updated tables will likely result in smaller annual distribution amounts.
- Updated guidance in the form of revisions to Revenue Ruling 2002-62 will be provided by the IRS. The timeline for the updated guidance has not been announced.
The IRS updated the life expectancy tables in order to reduce required minimum distributions (RMDs), which will allow retirees to retain larger amounts in their retirement plans to account for the possibility they will live longer than the current tables imply.
Impacts on SEPP 72t Plans
Those planning to start taking SEPP 72t distributions on or after January 1, 2022, will use the newly revised tables.
Those already taking SEPP 72t distributions using the Minimum Distribution method will be required to switch from the current tables to the new tables in 2022. This will not be considered a plan modification. To be clear: THE CHANGE WILL NOT “BUST” AN EXISTING PLAN, BECAUSE THE CHANGE IN THE ANNUAL AMOUNT IS MANDATED.
We will likely have to wait for the updated 2002-62 Revenue Ruling to be sure, but it does not appear that existing SEPP 72t plans using the Amortization or Annuitization method will be required to recalculate their distribution amounts using the new tables. Though, if you choose to make the one-time change to the Minimum Distribution method after January 1, 2022, you would be expected to use the revised tables. For reference, see KPMG article, Slott article, and FedWeek article.
The tables in the final regulation, published November 12, 2020 (see the bottom of the document), are different from the draft version, so be sure to reference the tables in the final regulation.
Frequently Asked Questions
- Why did the government decide to update the tables now? President Trump signed an Executive Order in August 2018 which, in part, ordered the review of the life expectancy tables in order to improve retirement security. The current life expectancy tables are from 2002, and will be turning 20 years old when the new tables come into effect.
- I thought the new tables were supposed to go into effect in 2021, what happened? The draft regulation was completed in November 2019 and submitted for public comment in January 2020. By the time the public comments were reviewed and the final regulation was completed, the commenters felt (and the IRS agreed) the timeline was too close to the original 2021 effective date for plan administrators to make the needed changes to their systems. Hence the 1 year extension to January 1, 2022.
- Does the IRS plan on revising the tables often? The new regulation suggests the IRS will review the tables again in 10 years, or sooner if a mortality study happens to be published in the interim.
- Which life expectancy tables are being revised? All three of the life expectancy tables used for calculating RMDs are being revised – the Single Life table, the Uniform Lifetime table, and the Joint & Last Survivor table.
- Are these revised tables applicable elsewhere other than SEPP 72t plans? Yes, the tables were revised primarily to help older retirees take a smaller bite out of their retirement plans each year through RMDs, so the accounts will last longer. Also impacted by the newly revised tables are those who have inherited a retirement plan (including a Roth plan). Anyone who inherited a retirement plan prior to January 1, 2020 and selected the “stretch” RMD method of withdraws will need to update their calculations to use the revised tables. This appears not to be straightforward, see Kitces article. After 2020, the “stretch” RMD option applies only to spouses and other “designated” beneficiaries inheriting a retirement plan after January 1, 2020, due to the SECURE Act. Non-designated beneficiaries (including adult children) are required to withdraw all funds within 10 years.