A big update to the life expectancy calculations done in required minimum distribution (RMD) tables is coming next year, and it means less money will have to be withdrawn annually. It’s a potential boon on a lot of fronts, believes Tom Duncan, senior director of the advanced consulting group for Nationwide.
The life expectancy ranges haven’t been updated since the beginning of the 2000’s, and with individuals generally living longer, the tables are due for an update. The RMD for 2021 will still be done using current tables, but beginning next year, smaller distributions will be required by owners and beneficiaries in order to extend the life of the balance over a longer time period.
So what does that mean for your retirement account? Firstly, pulling out smaller distributions equates to less taxation. It will allow for greater flexibility for individuals and couples to manage their tax brackets come the end of the year. Money that remains in an IRA could potentially continue to grow in a tax-deferred environment.
A second and very big benefit to having smaller RMDs is that more money remaining in the account equates to greater opportunity and runway to create growth for the portfolio. With the historic low-rate environments potentially drawing to an end, a chance to keep more money in an IRA and actively working for an individual could mean greater long-term returns.
Individuals who are the beneficiaries of retirement plans, IRAs, and nonqualified annuities that are just beginning distributions next year will start using the new tables immediately. For those who have already been utilizing RMDs based on the current life expectancy rate, there will have to be an adjustment for the new life expectancy; the current life expectancy being used for a 55-year-old is 29.6 years and will be extending to 31.6 years next year.
Nationwide has written a white paper that explains the calculations necessary to convert to the new RMDs as well as a breakdown of all of the new tables for those looking for a by-the-numbers approach.
“For many owners and beneficiaries, the overall increase in life expectancy represented in the updated tables is a welcome change as it will reduce the taxation on required distributions and provide more opportunity for growth and longer lasting account balances,” wrote Duncan.
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