United States Secretary of the Treasury Steven Mnuchin | January 11, 2018 (Official White House Photo by Andrea Hanks)

In an August 31 presidential order, President Trump asked the Treasury Department to consider increasing life expectancy rates for retirement accounts. The move could lower the required minimum distributions from those accounts, and leave more money leftover for heirs. Allyson Versprille reports for Bloomberg:

If Treasury increases those rates, which haven’t been updated since 2002, it would strengthen an estate-planning strategy known as the “stretch IRA,” in which an owner extends the ability to postpone paying taxes on money in his or her IRA by passing it to a non-spouse beneficiary, such as a child, grandchild, or even a great-grandchild.

With higher life expectancy rates, “there’s a greater chance that money will be left over” in the owner’s IRA when he or she dies “that could go to a younger generation and then continue on and compound,” said James F. Hogan, managing director at Andersen Tax LLC in Washington and a former IRS official.

How It Works

Under current law, when a person reaches age 70 1/2, he or she must take a yearly minimum amount—the required minimum distribution (RMD)—out of their 401(k)s or IRAs equal to the account balance on Dec. 31 of the previous year divided by the number of years left in the owner’s life expectancy.

Higher life expectancy rates mean that the amount a person must withdraw each year will be less, which will reduce the amount of taxes due and increase the odds that there will be more money in the retirement account when the owner dies, said Lester B. Law, a member of Franklin Karibjanian & Law PLLC who focuses on estate and trust planning. This means “there’s more money to go around,” said Law, a member of the Bloomberg Tax Estates, Gifts and Trusts Advisory Board.

Under the stretch IRA strategy, the owner leaves the IRA—and whatever money is in it—to a younger family member as opposed to a spouse.

In the year following the owner’s death, that non-spouse beneficiary must take RMDs from the inherited IRA each year, but the younger that person is, the greater his or her life expectancy, and the smaller the distributions will be.

This allows more of the money in the account to grow for a longer period of time on a tax-deferred basis. The stretch IRA strategy is especially beneficial when a Roth IRA is used because distributions are generally tax-free, while traditional IRA distributions are treated as ordinary income.

Two Tables

There are different life expectancy estimates, or “mortality tables,” for IRA owners and IRA beneficiaries.

Based on the broad nature of the language in the executive order, it’s unclear if Treasury will consider changing both tables, Hogan said. “It’s broad enough to give Treasury some latitude,” he said. If the life expectancy rates for both owners and beneficiaries are increased, that will further boost the benefits of the IRA stretch strategy, Hogan said.

Law said if Treasury updates its life expectancy estimates, it will likely revise both tables because they are traditionally released together in regulations. “I can’t imagine that you’d do one and not the other.”