New required minimum distribution rules under the Setting Every Community Up for Retirement Enhancement Act of 2019, or the Secure Act, are prompting regulators to alert investors as well as broker-dealers and advisors to some “tricky” new requirements.
The Financial Industry Regulatory Authority, for instance, just released an “updated” Investor Alert that answers questions on brokerage firms’ reporting obligations with respect to RMDs as well as whether an investor needs to take an RMD if they own an annuity. The answer: It depends.
President Donald Trump signed the Secure Act into law on Dec. 20 as part of the year-end spending bill, the Further Consolidated Appropriations Act of 2020 (FCAA).
As to whether investors must take an RMD if they own a variable annuity, and it’s held in an IRA, the answer is yes, FINRA states.
(Sign up for a Feb. 13 webinar: Understanding the SECURE Act: What Your Clients Need to Know)
“This is referred to as a ‘qualified annuity’ by the IRS, meaning that it likely was funded with pretax money that requires you to pay taxes on your withdrawals, as well as take RMDs,” the FINRA alert explains. “Non-qualified annuity contracts offer tax-deferred growth of after-tax funds; they are taxed when annuitized, but as a general rule are not subject to RMDs.”
What about taking the RMD from one account instead of separately from different types of retirement accounts?
“This one’s a little tricky,” FINRA states. If you are a traditional IRA owner, “you must calculate the RMD separately for each traditional IRA that you own, but can withdraw the total amount from one or more of the IRAs.”
Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts, FINRA states.
“However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts,” the alert says.
The IRS requires brokerage firms and other financial institutions that are custodians or trustees of traditional IRAs calculate or offer to calculate the RMD for IRA owners and to report this information to the IRS, the FINRA alert explains.
“Firms that serve as administrators to employer-sponsored retirement plans typically have the same responsibility for plan participant RMDs,” FINRA states, but mistakes can be made.
Investors, FINRA counsels, should carefully doublecheck any firm’s RMD computation using the IRS’ RMD worksheets.
Tools such as FINRA’s RMD Calculator can also be helpful, as can the assistance of a tax professional.
Investors should take note, however, that the IRS “makes very clear” that RMD calculations are ultimately the taxpayer’s responsibility, FINRA warns, “so don’t rely blindly on calculations by your IRA custodian or retirement plan administrator.”
But all is not lost if mistakes are made. The IRS has stated in a FAQ 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,” the FINRA alert explains.
In order to qualify for this relief, an investor must file Form 5329 and attach a letter of explanation.
(Sign up for a Feb. 12 webinar: Understanding the SECURE Act: What Your Clients Need to Know)
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