auction based bonds in IRA
I am 69 and have monies in bonds that have been failing at monthly auction. When I have to start liquidating my IRA and I don’t have access to my auction bond monies, how do I deal with the issue and what is the IRS’s position.
Answers appreciated1
Permalink Submitted by Alan Spross on Tue, 2009-02-03 23:34
Your entire IRA is funded with auction rate securities? If you have any liquid holdings when RMDs begin, you must distribute them to satisfy your RMD. Many large institutions have been buying back the bad auction rate securities, and you should check with yours. There might also be a class action filed and any proceeds could be rolled back to your IRA.
If nothing happens and RMDs must begin and all you have are these securities, the IRA custodian must declare a year end value for the holdings in order to determine what the RMD amount is in the first place. You could then distribute the shares needed in kind rather than cash. An RMD need not be taken in cash. Your first RMDs are less than 4% of the prior year end account balance.
Permalink Submitted by Al Diesz on Wed, 2009-02-04 00:22
Thanks for the reply. No the auction based bonds are not the only part of my IRA. The auction based bonds are auctioned monthly with no bidders. I originally purchased them and was ignorant of the “weasel words” attached to the bonds. The bonds are Vermont Student loan bonds that I purchased through TD Ameritrade and have complained to both Ameritrade that the bond broker did not inform me of the clause governing the bonds. I also complained to a broker trade group with no reponse.
So, if I understand you correctly, I am required to liquidate my other holdings first and then the picture gets cloudy as to what is next. I know that you explained it, but bear with my and try again.
Thanks
Permalink Submitted by Alan Spross on Wed, 2009-02-04 01:14
If you have the other assets in your IRA, the IRS would clearly expect you to use them for your RMDs. Even if the bonds are illiquid when the RMD first becomes due (your first one can be deferred to April 1st of the year following the year you turn 70.5),and if they were the ONLY assets in your IRA, you would be expected to distribute shares equal to your RMD if a value could be placed on the securities by the IRA custodian.
Even if no value could be placed on any of your IRA holdings, if your first RMD was 3.65%, then if you distributed 3.65% of the shares of each holding, you would have met your RMD requirement. The % is determined by dividing 100 by the Uniform Table divisor for age 70 or 71 as the case may be. Because there are so many ways that an RMD can be taken, the IRS has not established any guidelines for accounts that do not hold any assets that can be valued. Basically, the IRS does not care whether you take RMDs in cash or in shares as long as the applicable % of the account is distributed out to a taxable account.
The RMD for 2009 has already been suspended, and if there is further financial chaos, the chances are reasonably good that this exception could be extended for more years.
The larger problem for you is getting a decent value for these assets rather than how to get a small % of them out of your IRA and into a taxable account, since this can be done in shares rather than dollars.