Using New RMD Tables to Figure a Series of Substantially Equal Periodic Payments

Usually, there’s a 10% penalty for distributions from an IRA. qualified employer plan, or a commercial annuity before age 59½. However, the penalty does not apply if distributions are taken in a series of substantially equal periodic payments. Twenty years ago, the IRS provided three methods for figuring these penalty-free payments: required minimum distribution method, fixed amortization method, and fixed annuitization method (Rev. Rul. 2002-62). The first two methods rely on life expectancy and mortality rates reflected in IRS life expectancy tables used to figure required minimum distributions from IRAs and qualified retirement plans, and the third method uses an annuity factor derived from the mortality table used to develop the life expectancy tables. New tables became effective on January 1, 2022. Now the IRS has provided guidance on how to apply the new tables to figure a series of substantially equal periodic payments (Notice 2022-6).

The three life expectancy tables—Uniform Lifetime Table, Single Life Table, and Joint and Last Survivor Table—are used to figure payments for the penalty exception. (The Appendix of Notice 2022-6 has the Uniform Lifetime Table; the others are in IRS regulation 1.401(a)(9)-9.) The number of years that is used for the required minimum distribution method for a distribution year is the entry from the table for the taxpayer’s age on the taxpayer’s birthday in that distribution year. If the Joint and Last Survivor Table is used, the age of the designated beneficiary on the designated beneficiary’s birthday in the distribution year is also used. For the required minimum distribution method, the same life expectancy table that is used for the first distribution year must be used in each following distribution year. The number of years that is used to apply the fixed amortization method is the entry from the table for the taxpayer’s age on the taxpayer’s birthday in the first distribution year (and, if applicable, the designated beneficiary’s age on the designated beneficiary’s birthday in that year).

If the Joint and Last Survivor Table is used to apply the required minimum distribution method or the fixed amortization method (or if the fixed annuitization method is applied using an annuity factor determined for the joint lives of the employee and designated beneficiary), then the beneficiary whose life expectancy or expected mortality is used must be the actual designated beneficiary of the employee with respect to the account for the year of the determination. If the employee has more than one beneficiary, the identity and age of the designated beneficiary used for purposes of each of the methods is that of the older or oldest beneficiary. The designated beneficiary is determined for a distribution year as of January 1 of the distribution year, without regard to changes in the designated beneficiary later in that distribution year or designated beneficiary determinations in prior distribution years. For example, if an IRA owner starts distributions from an IRA in 2023 at age 50, and applies either the required minimum distribution method or fixed amortization method using the Joint and Last Survivor Table for the IRA owner and the designated beneficiary, and the beneficiaries on January 1, 2023, are 25 and 55 years old, the number of years used to calculate the payment for 2023 would be 40.2 (the entry from the Joint and Last Survivor Table for ages 50, the age of the IRA owner, and 55, the age of the older beneficiary), even if later in 2023 the 55-year-old is eliminated as a designated beneficiary. However, under the required minimum distribution method, if the 55-year-old beneficiary is eliminated or dies in 2023, that individual would not be taken into account in future distribution years. If there is no designated beneficiary in a future year, the Single Life Table is used for that distribution year.

The fixed amortization and the fixed annuitization method use an interest rate to figure the payments.  Under Notice 2022-6, the interest rate used can be up to 5%, or, if greater, 120% of the federal mid-term rate for either of the two months immediately preceding the month distributions begin.

The new life expectancy tables and the 5%/120% interest rule apply to a series of distributions beginning on or after January 1, 2023. However, you may opt to use them for a series of payments beginning in 2022.