Table of Contents

Life Expectancy Method: Overview, Types, and Example

By

澳洲幸运5官方开奖结果体彩网:Julia Kagan

Updated September 06, 2024

Reviewed by

Charlene Rhinehart

Couple looking at the ocean — Getty Images

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 policyholder’s anticipated length of life. The life expectancy method is the most straightforward method for calculating 澳洲幸运5官方开奖结果体彩网:required minimu💫m distributions (RMDs).

Key Takeaways

The life expectancy method is the primary way of figuring out your RMD amounts.
RMDs are required distributions that must be withdrawn from certain retirement accounts once the owner reaches a designated age.
The RMD age used to be 72, but the passage of SECURE 2.0 Act increased the RMD age to 73.
The life expectancy method takes into account your actuarial life expectancy and the starting account balance.
The two most common ways of evaluating life expectancy are the term-certain and recalculation methods.

Understanding the Life Expectancy Method

RMDs are required distributions that must be withdrawn from certain retirement accounts once the owner reaches age 73.

The life expectancy method is used to calculate RMDs from traditional IRAs or 澳洲幸运5官方开奖结果体彩网:qualified retirement accounts, such as 401(k) plans. This method uses 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) 澳洲幸运5官方开奖结果体彩网:life expectancy factors along with the value of your IRA in the year before that year’s withdrawal. This is, therefore, a variab🎉le method: If your IRA value increases or decreases, the distribution amount will increase or decrease accordingly. This is also the cas🌼e when it comes to your life expectancy.

Important

IRS actuarial tables help determine the澳洲幸运5官方开奖结果体彩网: 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: the term-certain method and the recalculation method.

Term-Certain Method

With the term-certain method, a 澳洲幸运5官方开奖结果体彩网:distribution (withdrawal) from the retirement account is based on your life expectancy at the time of your first withdrawal. With each following yearꦬ, the account is steadily depleted as life expectancy reduces by one year. The retirement account will eventually be empty once you reach your life expectancy 🅠age. This means that if you outlive your life expectancy, you won’t have any funds left.

Recalculation Method

To offset the risk of outliving the annuity payments, some choose the recalculation method, which differs from the term-certain method. It recalculates your life expectancy every year. In this case, you are withdrawing as little as possible from your account. However, if your 澳洲幸运5官方开奖结果体彩网:beneficiary dies prematurely, you would have to refigure withdrawals 🎶based on your lifꦍe expectancy alone.

Example of the Life Expectancy Method

Let’s look at the case of a 54-year-old single woman who chooses the term-certain method of life expectancy withdrawals. In this scenario, if the woman wants to begin receiving IRA distributions in 2025, she must first calculate the total account value as of Dec. 31, 2024, as well as her life expectancy according 🌟to IRS Publication 590 Appendix C. If the account value were $100,000 and her li﷽fe expectancy is 30.5 years, the amount she can receive in distributions each year is $3,278.69.

The fol꧑lowing year, the now 55-year-old would again take note of the account balance on Dec. 31 and divide the amount by 29.6, her new life expectancy. Essentially, the older she becomes, the shorter her life expectancy becomes, although this relationship is not linear.

What Is a Life Expectancy Table?

The IRS publishes an annual table of life expectancy in which the account owner’s age corresponds to a life expectancy factor. The IRS revises this table every year, and the table is used to determine the RMD as the account balance of the o൲wner is divided by the life expectancy factor from this table.

At What Age Should I Stop Investing in an IRA?

The SECURE Act of 2019 removed the age limit to contribute to a traditional IRA. As long as you have earned income, you may contribute up to the contribution limit. For 2024, the most you can contribute to a traditional or Roth IRA is $7,000. Investors age 50 or older can contribute an additional $1,000 as a 澳洲幸运5官方开奖结果体彩网:catch-up contribution.

At What Age Are IRA Withdrawals Penalty-Free?

You can withdraw from your IRA beginning at age 59½ without restriction or penalty. Before that age, your withdrawal will be included in your taxable income and may be subject to a 10% additional tax.

The Bottom Line

The IRS uses a life expectancy table to determine how much of a required minimum distribution you need to take from your IRA. This life expectancy table is determined based off your age, and the IRS revises these estimates each year. Investors who want to be mindful of how muchꩲ they are required to withdraw during retirement should understand how their current age, current investment balance, and life expectancy will dictate their🍸 RMD.

Correction—Sept. 6, 2024: This article was corrected to state that IRA withdrawals at age 59½ or older are penalty-free, not tax-free.

Article Sources

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Internal Revenue Service. “.”
Internal Revenue Service. “.”
Congress.gov, 𒀰U.S. Congress. “,” Title 1: Section 107.
Internal Revenue Service. “.”
Internal Revenue Service. “.”

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