Understanding the Life Expectancy Method for IRA Distributions

Key Takeaways

• The life expectancy method calculates IRA payments by dividing the account balance by the policyholder’s anticipated length of life.
• Required Minimum Distributions (RMDs) must be withdrawn from certain retirement accounts starting at age 73.
• The term-certain and recalculation methods are the two primary approaches to evaluating life expectancy for retirement distributions.
• The recalculation method recalculates life expectancy annually, allowing for minimal withdrawals, while the term-certain method depletes the account by the life expectancy age.
• IRS tables, revised annually, are used to determine life expectancy factors impacting RMD calculations.

What Is the Life Expectancy Method?

The life expectancy method is a way of calculating individual retirement account (IRA) distribution payments by dividing the account’s balance by the policyholder’s expected lifespan.

It ensures compliance with required minimum distributions (RMDs) as outlined by the IRS, which provides life expectancy tables to guide these calculations. These official tables are located in IRS Publication 590-B.

The method can follow either a term-certain or recalculation approach, determining how payments adjust over time.

How the Life Expectancy Method Determines IRA Withdrawals

RMDs are required distributions that must be withdrawn from certain retirement accounts once the owner reaches age 73.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 qualified retirement accounts, such as 401(k) plans. This method uses Internal Revenue Service (IRS) life expectancy factors along with the value of your IRA in the year before that year’s withdrawal. This is, therefore, a variable method: If your IRA value increases or decreases, the distribution amount will increase or decrease accordingly. This is also the case when it comes to your life expectancy.

Important

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

Exploring Different Life Expectancy Methods for Withdrawals

There are two types of life expectancy methods: the term-certain method and the recalculation method. The legal and regulatory framework governing these methods is outlined in Treasury Regulation Section 1.401(a)(9)-5. For practical, step-by-step instructions, worksheets, and the official Single Life Expectancy tables, refer to IRS Publication 590-B.

The Term-Certain Life Expectancy Method: Predictability Over Time

With the term-certain method, a distribution (withdrawal) from the retirement account is based on your life expectancy at the time of your first withdrawal. With each following year, 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.

The Recalculation Method: Adjusting Withdrawals Annually

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. With this method, you withdraw as little as possible. If your beneficiary dies early, you’ll need to recalculate withdrawals using only your life expectancy.

Case Study: Applying the Life Expectancy Method to IRA Distributions

Let’s look at the case of a 54-year-old single woman who chooses the term-certain method of life expectancy withdrawals. Suppose she wants to start receiving IRA distributions in 2025. In that case, she must calculate her account value by Dec. 31, 2024, and her life expectancy using IRS Publication 590, Appendix C. If the account value 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 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 owner 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 for contributing to a traditional IRA. As long as you have earned income, you may contribute up to the contribution limit.56 For 2026, the most you can contribute to a traditional or Roth IRA is $7,500. Investors age 50 or older can contribute an additional $1,100 as a 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.5 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 life expectancy method calculates IRA distributions by dividing the account balance by the policyholder’s projected lifespan, ensuring compliance with Required Minimum Distributions (RMDs) starting at age 73 or 75, depending on the year you were born.

Based on IRS actuarial tables, RMDs use life expectancy factors and account balances to set withdrawal amounts. Investors can choose between term-certain or recalculation methods, and understanding how age and balance changes affect RMDs is vital for sound retirement planning.