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When To Use The New Life Expectancy Tables Issued in November, 2020 For SEPP Distributions
THE MARBLE GROUP, LTD.
173 North Ridge Road
Bailey, Colorado 80421
Dear Friends and Clients:
New Life Expectancy Tables
When To Use Them For IRC §72(t)(2)(A)(iv)
In November, 2020 the IRS issued TD9930 with long awaited and updated life expectancy tables. Just focusing on good old Table I; Single Life Expectancies, causes a two-year increase in one’s life expectancy. Translated into dollars, this causes an approximate 5.5% decrease in computed distribution amounts:
(1) For the computation of RMD amounts, taxpayers will generally like it as it causes the RMD amounts to decrease going forward.
(2) For SEPP plan distribution amounts, taxpayers will generally dislike it as they are generally seeking out the highest distribution amount possible.
(3) Further, there are a variety of other IRC code sections that rely upon life expectancies and interest rates which will all be affected. One’s like or dislike here will depend on which side of the tax fence one happens to sit.
The question here is which tables to use for implementing Revenue Ruling 2002-62 for the correct computation (or recalculation) of distribution amounts pursuant to IRC §72(t)(2)(A)(iv) ---- substantially equal periodic payments?
TD9930 very clearly states “Applicability Date: The final regulations in this document apply to distribution calendar years...on or after January 1, 2022". Looks pretty straight forward; but is it?
99.9% of TD9930 is devoted to RMD’s (“required minimum distributions”) essentially for the over 70 crowd. However, on page 17 we find:
“V. Use of Revised Tables to Determine Substantially Equal Periodic Payments”
The Treasury Department and the IRS anticipate issuing guidance that would update Rev. Rule 2002-62. This update would apply the life expectancy, distribution period, and mortality tables set forth in these regulations for purposes of determining substantially equal periodic payments once these regulations become effective.”
Finally, some on-point language; or is it? I can interpret the above to say any of three different things:
(1) Stay with the old tables (theoretically indefinitely) until an updated Rev. Rule 2002-62 comes out (which has not happened to the best of my knowledge).
(2) Stay with the old tables for 2021 and automatically switch to these new tables in 2022.
(3) Switch to the new tables for 2021 immediately.
In my opinion, the above says the authors (some of whom I know) are going to think about it and will let us now in the future. Unfortunately, the future is here and they didn’t let us know and have instead left us with a black hole.
How could (3) be right? Well, the current Rev. Rule 2002-62 says to go to IRC Reg. §§ 1.401(a)(9)-9 and get the right life expectancy (used to be 29.6 for a 55 year old and is now 31.6 for a 55 year old). These new expectancies now sit as final regulations in §§1.401(a)(9). For RMD’s it is explicit – use old tables for 2021 and switch to new tables for 2022. I find no language in Rev. Rule 2002-62 that causes a calendar year delay to 2022; instead I find that exact reverse ---- it says to go to §§1.409(a)(9) and use whatever you find. I further find no “delay language” imbedded in §§1.409(a)(9) or anywhere else to apply to SEPPs. Lastly, the default applicability of all issued rules and regulations by the IRS has always been: optionally adopt upon issuance immediately and mandatory adoption the following January 1st unless you find contrary language.
So, is this a trap? Is the IRS trying catch a 55-year-old taxpayer inadvertently using 29.6 in 2021 when he should have used 31.6 for the correct life expectancy. My opinion is actually no despite the IRS having used tactics like this in the past. I think this is an oversight and we have again fallen into the back-waters of IRS workload. Alternatively, how many millions of taxpayers are interested in RMD rules versus how many thousands are interested in SEPP rules?
So, what is the right answer? Again, in my opinion there might not be a rock-solid right answer. Instead, we had best look for the safest answer. If (3) is right and you assume (1) or (2) above you will automatically over-distribute in 2021 (and potentially beyond) and if audited potentially face the issue of how to put back an over-distributed amount into an IRA. As I have often said in the past sometime you can put the genie back in the bottle; sometimes you can’t.
If insterad, you assume (3) above you are 100% safe under all outcomes and have by implication assumed an interest rate somewhat lower than the right applicable federal rate just in case the real right answer is eventually (1) or (2) above.
Therefore, adopt the new life expectancies immediately. You can never be wrong and you can never inadvertently violate Revenue Ruling 2002-62.
I am not about to issue any opinion contrary to this professional analysis. However, I suggest waiting until later in 2021 to make any change in the SEPP 72-T Distributions on existing plans AT THIS TIME.
Since the change would reduce the ANNUAL PAYMENTS by 5.5% (according to the posting), I would wait until Nov/Dec, and hopefully we will get applicable clarification from the IRS. The only taxpayers who might have taken an excess distribution so far in 2021 would be those who took their entire 2021 distribution already, probably as a once a year annual distribution.
Everyone else can adjust for this change if it is ultimately deemed to be applicable during 2021. Since MONTHLY distributions are 8.333% of the ANNUAL required amount, then they can just reduce their Dec distribution by 66% ( .055/.08333) if the IRS clarifies this situation by then, or if they decide to do it even if the IRS does not issue any clarification. (Quarterly distributions would be reduced by 22% or the final distribution. Semi-annual distributions would be reduced by 11%.)
Good day all,
I realize it's still early and no solid guidance has been issued by the IRS concerning previously established SEPP plans. However, I'd like to pose a question related to the topic of new life expectancy tables. If the IRS requires previously established SEPP plans (amortization/annuitization methods) to recalculate using the updated life expectancies, will it also be a requirement to use the current applicable mid-term rates when recalculating? I'm asking this because I began my plan with my first distribution in May 2019. Current mid-term rates are lower than they were two years ago and that would have a big impact on the annual distribution amount that I've been receiving via SEPP.
As always, THANK YOU!! This site has been invaluable to me for planning and executing my SEPP.
The IRS did issue guidance when the CARES Act was passed. SEPP 72-T plans, like all IRA and 401-K/403-B plans MUST use he new Life Expectancy and Factors starting with 2022 distributions. All SEPP 72-T will have to recalculate the FIXED ANNUAL DISTRIBUTIONS accordingly. As a result, the ANNUAL DISTRIBUTIONS will be REDUCED, and that will NOT be deemed to be a change, and will NOT BUST the plans.
I think this is all explained in the information elsewhere on this website.
BUT, you pose an interesting nuance which has not yet been addressed. I will follow up with my contacts at the IRS, and with other tax professionals.
Thank you again. I am most appreciative of your time and I will keep watch for any additional replies to this post.
No, but I’d be surprised if they would REQUIRE people to recalculate EXISITING plans. I would think it would be more for new plans. The final regs say that “Revenue Ruling 2002-62, 2002-2 C.B. 710, provides that the life expectancy tables set forth in §1.401(a)(9)-9 may be used for purposes of determining payments that satisfy the exception under section 72(t)(2)(A)(iv).” (Note the “may”). Most people would not want to use the new tables for existing plans even if they could since this would make their payments smaller, but their taxes on the lower payments would also be lower. It would depend how much cash flow the taxpayer needs starting in 2022, especially if their situation has changed financially since they started their plans. But hopefully IRS will clarify.
https://public-inspection.federalregister.gov/2020-24723.pdf. Click or tap to follow the link." href="https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fpublic-inspection.federalregister.gov%2F2020-24723.pdf&data=04%7C01%7C%7Cb93a53bbaed445ba839f08d90e542081%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C637556576744046579%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=yoYni60fbzQE1ruAQl1U7RSflxVUbVk%2BAnq1rmA%2B3SI%3D&reserved=0" target="_blank" rel="noopener noreferrer" data-auth="Verified" data-linkindex="0"> https://public-inspection.federalregister.gov/2020-24723.pdf (page 8)
Here's a clean link to the ruling referred to above: Federal Register Updated Life Expectancy and Distribution Period Tables Used For Purposes of Determining Minimum Required Distributions ruling dated November 12, 2020. Refer to page 8.
Thanks to both of you for responding.
I've followed the link provided and reviewed the IRS 'final regulation', which became effective on November 12, 2020. In that document it states in section V the following:
V. Use of Revised Tables to Determine Substantially Equal Periodic Payments
" The Treasury Department and the IRS anticipate issuing guidance that would update Rev. Rul. 2002-62. This update would apply the life expectancy, distribution period, and mortality tables set forth in these regulations for purposes of determining substantially equal periodic payments once these regulations become effective. "
I couldn't find any language in the document that addresses existing SEPP plans with regards to whether or not they are to be adjusted based on the updated life expectancy tables. For what it's worth, my plan is to stick with my original SEPP plan and take my 2021 distribution in the exact amount as my previous two years. Hopefully the IRS will provide further guidance to address existing plans, prior to 2022.
At this point, it appears that taxpayers have 2 choices -- continue the same distributions, or they will be allowed to lower their annual distributions if they revise their calculations by using the new life expectancies if they do not want/need the higher annual distributions under their original plans.