Noting that it often receives questions about required minimum distributions (RMDs) around tax time, FINRA has released an Investor Alert outlining 10 common questions about RMDs.
Since the RMD rules can be complex, especially with respect to beneficiary distributions and the correction of miscalculations or missed RMD obligations, FINRA’s alert focuses on RMDs from traditional IRAs because, it says, “these are the type of retirement accounts where individuals are directly responsible for computing required minimum distributions.”
Under the SECURE Act, individuals who turned 70½ years old on or after Jan. 1, 2020 are eligible for the law’s changes and generally must begin taking RMDs by April 1 of the year following the year in which they turn 72, FINRA notes. Those who turned 70½ in 2019 are out of luck, however – they are not eligible for the law’s changes and generally must begin withdrawing money by April 1, 2020. (The IRS recently issued a clarification on the notifications about RMDs that must be provided to IRA owners who will turn 70½ in 2020 in light of the provisions of the SECURE Act.)
To that end, the alert notes that the IRS has valuable information and it suggests that individuals may want to consult with a tax professional, especially if this is the first time they are taking a distribution.
Importantly, the alert warns that if an individual doesn’t take a required distribution or if he or she does not meet the RMD amount, the person may have to pay a 50% excise tax on the amount not distributed.
All is not lost, however, if a mistake is made in the RMD calculation. FINRA notes that in one of its FAQs, the IRS states that penalties “may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.”
As for reporting obligations, FINRA emphasizes that the IRS requires brokerage firms and other financial institutions which are custodians or trustees of traditional IRAs to calculate, or offer to calculate, the RMD for IRA owners and report this information to the IRS.
Moreover, it notes that firms which serve as administrators to employer-sponsored retirement plans typically have the same responsibility for plan participant RMDs. At the end of the day, however, the IRS makes it clear that RMD calculations are ultimately the taxpayer's responsibility – “so don't rely blindly on calculations by your IRA custodian or retirement plan administrator,” FINRA emphasizes.
Additional questions addressed in the alert include:
- How do I calculate the RMD?
- Can I withdraw more than the minimum required amount?
- If I do take more than the minimum amount, can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
- Can I just take the RMD from one account instead of separately from each account?
- What happens if a retirement plan account owner or IRA owner dies before RMDs have begun?
- Do I have to take an RMD if I own an annuity?
