A year ago, in November 2019, the Internal Revenue Service (IRS) proposed to use new life expectancy tables to calculate required minimum distributions for the years 2021 and beyond. Well, the coronavirus affected the implementation date of the new tables – the IRS announced on November 6th that the new tables will not be implemented for 2021 RMDs, rather they will now be effective for RMDs beginning in the year 2022. When the tables change in 2022, it will have been 20 years since there has been a change in the tables.
A couple of interesting items hiding in the new tables are the facts that an individual who has reached the age of 120 has a 100% chance of dying at that age, and that an individual in their first year of life has a higher chance of death than a 50 year old. It’s not until the age of 51 that the chance of death is greater than it is for a child in their first twelve months.
I’m sure all of the readers of this article are between the ages of 0 and 120, so how does this affect us? The IRS Uniform Life Expectancy Table is what the Thrift Savings Plan uses to calculate required minimum distributions (RMDs) for those 72 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 Individual Retirement Arrangement (IRA) before they reach 59 ½.
The new tables assume a somewhat longer life expectancy, which 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 12/31/2020 and turned 72 in 2021, the factor would be 25.6. This would result in a RMD of $11,718.75. When the new tables are effective in 2022, the factor for a 72 year old will change to 27.4, reducing the RMD to $10,948.51.
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.
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.
The TSP Concludes a Strong Year
The G Fund indeed was the worst-performing fund for the rest of the year. Anyone who stuck with a diversified portfolio, or used a contrarian tactical approach, did quite well in 2020.
The G Fund is Underperforming Inflation
If TSP investors leave money in the G Fund, it is guaranteed not to lose money nominally, but slowly chips away at purchasing power at current rates. On the other hand, if they invest heavily in the equity funds, they have more upside exposure, but also a lot more volatility risk.