Life Expectancy Method Definition

What is the life expectancy method?

The life expectancy method is a way of calculating individual retirement account (IRA) distribution payments by dividing the balance or total value of a retirement account by the expected life of the insured. The life expectancy method is the simplest method for calculating minimum required distributions (RMD) for retirement accounts by the Internal Revenue Service (IRS).

Key points to remember

  • The life expectancy method is the primary way to determine your RMD amounts.
  • RMDs are mandatory distributions that must be withdrawn from certain retirement accounts once the owner reaches age 72. (Note that RMDs have been suspended for 2020.)
  • The life expectancy method takes into account your actuarial life expectancy and the initial account balance.

Understanding the Life Expectancy Method

RMDs are mandatory distributions that must be withdrawn from certain retirement accounts once the owner reaches age 72. Please note that the IRS has suspended RMDs for retirement accounts, including IRAs and 401(k)s for 2020 However, this exemption is not in place for 2021.

The life expectancy method is used to calculate RMDs from traditional IRAs or qualified retirement accounts, such as 401(k) plans. Minimum withdrawal amounts must be taken from these accounts from the age of 72.

This method uses IRS life expectancy factors as well as the value of your IRA in the distribution year before that year’s withdrawal. It is therefore a variable method, and if the value of your IRA increases or decreases, the amount of the distribution for the year will increase or decrease accordingly. This is also the case when it comes to your life expectancy.

IRS actuarial tables help determine the life expectancy of the owner or the joint life expectancies of the owner and a beneficiary.

Types of Life Expectancy Methods

There are two types of life expectancy methods: fixed term method and the recalculation method.

Fixed term method

In the certain term method, Distribution or the withdrawal from the retirement account is based on your life expectancy at the time of the first withdrawal. Each subsequent year, the account steadily depletes as life expectancy decreases by one year. The retirement account will eventually empty once you reach the age of your life expectancy. Thus, some people may completely deplete their funds if they outlive their life expectancy.

Recalculation method

To compensate for the risk of surviving annuity payments, some choose the recalculation method, which differs from the fixed-term method by recalculating your life expectancy each year. In this case, you withdraw as little as possible from your account. However, if your beneficiary dies prematurely, you will need to recalculate the withdrawals based on your life expectancy alone.

Example of the life expectancy method

Consider the case of a 54-year-old single woman who chooses the fixed-term method of life expectancy withdrawals. In this scenario, if the woman wishes to begin receiving IRA distributions in 2021, she must first calculate the total value of the account as of December 31, 2020, as well as her life expectancy according to IRS publication 590 Appendix C. If the value account were $100,000 and her life expectancy is 30.5 years, the amount she can receive in distributions each year is $3,278.69.

The following year, the now 55-year-old woman would again take note of the account balance as of December 31 and divide the amount by 29.6, her new life expectancy. Essentially, the older she gets, the more her life expectancy decreases, although this relationship is not linear.

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