Investor Alerts

Required Minimum Distributions—Common Questions About IRA Accounts

Every year, around tax time, FINRA receives questions from investors about required minimum distributions, or RMDs. In a nutshell, an RMD is the amount you must take out of your traditional retirement savings plan to avoid tax penalties, once you've reached the mandatory age for making withdrawals, usually 70½.

We are issuing this alert to provide basic information about RMDs, and to provide answers to a number of common RMD questions. We focus on RMDs from traditional IRAs because these are the type of retirement accounts where individuals are directly responsible for computing required minimum distributions.

The IRS Has Valuable Information

The IRS provides important taxpayer information about RMDs, including FAQs and resources to help you accurately compute your annual RMDs. According to the IRS, if you have a 401(k) or another employer-sponsored plan, including the federal government’s Thrift Savings Plan, your plan sponsor or administrator should calculate the RMD for you.

Common IRA-Related RMD Questions

RMD rules can be complex, especially with respect to beneficiary distributions and the correction of miscalculations or missed RMD obligations. For this reason, you may want to consult with a tax professional, especially if this is the first time you are taking a distribution.

Fortunately, some of the most common RMD questions related to IRAs have fairly clear-cut answers. Here are some answers to frequently asked questions:

1. What are required minimum distributions?

RMDs are minimum amounts that you must withdraw annually from your traditional IRA, 401(k), 403(b) or other retirement savings plan once you've reached the mandatory age for making withdrawals. For traditional IRAs, IRS rules mandate that you take your first RMD by April 1 of the year following the calendar year in which you reach 70½ years of age. For each subsequent year after you begin taking RMDs, you must withdraw your RMD by December 31. Note that the amounts you withdraw typically count as taxable income unless you already paid taxes on your contributions.

Example: You turned 70½ on July 15, 2016. That means you must take your first RMD (for tax year 2016) by April 1, 2017. You must take your second RMD, for 2017, by December 31, 2017, and your third RMD, for 2018, by December 31, 2018—and so on. 

2. How do I calculate the RMD?

The RMD for any given year is the total account balance in your IRA, or IRAs, as of the end of the immediately preceding calendar year divided by a distribution period. You can find the distribution period using the IRS's Joint Life and Last Survivor Expectancy Worksheet if your spouse is the sole beneficiary and is more than 10 years younger than you, or the Uniform Lifetime Worksheet for all other IRA owners.

Example: You are 72 years old in 2016 and your wife is not more than 10 years younger than you. To figure out your RMD for this year (2017), divide the value of each IRA you own as of December 31 of last year (2016) by the distribution figure found in the appropriate IRS worksheet referenced above. For instance, if an IRA amount at the end of 2016 is $100,000, you would divide $100,000 by 25.6 (which comes from the IRS Uniform Lifetime Worksheet), for an RMD for that IRA of $3,906.25.

3. What if I don't take any distributions, or if the distributions I take do not meet the RMD amount?

You may have to pay a 50 percent excise tax on the amount not distributed.

4. Can I withdraw more than the minimum required amount?

Yes. However, be aware that the amount of your RMD, as well as any amount that exceeds the RMD, will be considered taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from designated Roth accounts).

5. 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?


6. Can I just take the RMD from one account instead of separately from each account?

This one's a little tricky. 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. 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.

A Word About Roth IRAs

Roth IRAs do not require RMD withdrawals until after the death of the owner. If you have a Roth account in an employer-sponsored plan, the IRS recommends that you contact your plan sponsor or plan administrator regarding RMD information.

7. What happens if a retirement plan account owner or IRA owner dies before RMDs have begun?

Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2) over the life of the beneficiary starting no later than one year following the owner's death. See IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), for complete details on when beneficiaries must start receiving RMDs and use the Single Life Expectancy Table found in the publication to compute amount owed.

8. Do I have to take an RMD if I own an annuity?

The answer depends on the type of annuity you own. If you own a variable annuity, and it is held in an IRA, the answer is yes. This is referred to as a "qualified annuity" by the IRS, meaning that it likely was funded with pre-tax money that requires you to pay taxes on your withdrawals, as well as take RMDs. 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. (For tax treatment of qualifying longevity annuity contracts (QLACs), see the IRS Bulletin on longevity annuities.)

9. What reporting obligations does my brokerage firm have with respect to RMDs?

Unlike cost basis reporting, where the IRS requires brokerage firms and other financial institutions to provide investors with certain information, there are no formal RMD reporting obligations placed upon brokerage firms. As a service to customers, brokerage firms may provide RMD computations. But mistakes can be made, and investors should carefully double-check any brokerage firm's RMD computation using the IRS's RMD worksheets. Tools such as FINRA's RMD Calculator can also be helpful, as can the assistance of a tax professional.

One thing the IRS makes very clear is that RMD calculations are ultimately the taxpayer's responsibility, so don't rely blindly on calculations by your IRA custodian or retirement plan administrator.

10. What if a mistake is made?

All is not lost if you or someone you entrust to do your RMD calculations makes a mistake. 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." In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.

If you have a problem with your investment professional, or believe an investment is not suitable, file a complaint with FINRA or contact FINRA's Securities Helpline for Seniors® (1-844-57-HELPS (1-844-574-3577)). A tax professional can help you navigate the RMD landscape. To learn more, check out our information on accountants.

Last Updated: 
April 7, 2016