The IRS recently proposed an update to its life expectancy tables (these are the actuarial tables used to value annuities, life estates, remainders, and reversions, among other applications).
As with all proposed regulations, there is a comment period, but it is quite likely they will be adopted for tax year 2021. Assuming that the proposed tables become effective, it will have been 19 years (2021 – 2002) since these have changed, and they would reflect a longer life span overall.
Of note in the proposal:
– an individual who has reached the age of 120 has a 100% chance of dying at that age.
– an individual in their first year of life has a higher chance of death than a 50 year old.
– only by age of 51 is chance of death is greater than it is for a child in his first twelve months.
The IRS Uniform Life Expectancy Table is what the TSP uses to calculate required minimum distributions (RMDs) for those 70 ½ or over. It is also what will be used to calculate 72(t) payments from their TSP for those who separate before the year they turn 55 (50 for special category employees) and those who take money from an IRA before they reach 59 ½.
How will the proposed tables affect us? The new tables assume a somewhat longer life expectancy, so that would reduce the size of required distributions.
We will use RMDs as an example and calculate the distribution (as the TSP would) using the Uniform Life Expectancy Table. RMDs are calculated based on the prior year’s ending account balance divided by a factor based on the age an individual turns in the year in question.
If I had $300,000 in my TSP on 12/31/2018 and turned 72 in 2019, the factor would be 25.6. This would result in a RMD of $11,718.75. After the new tables are effective, the factor for a 72 year old will be 27.3, reducing the RMD to $10,989.01.
Is this a big deal for most of us? No. It will, however allow those who do not want to take a lot from their TSP (and IRAs as well) to keep more of their money longer. It would be especially beneficial to those who are counting on passing a larger sum to their heirs when they die.
Note: Those already taking 72(t) based payments will be allowed to switch from the current table to the new table in 2021 without any concern of losing 72(t) protection by modifying the current payment plan.