RMD when IRA is illiquid
I have a client who will be 70-1/2 in September. Currently, the only asset of the IRA is a partnership that is not able to make any distributions. How is the RMD calculated? Since no cash will be distributed, does my client pay tax on a “phantom distribution.”
Permalink Submitted by Alan Spross on Wed, 2011-08-10 23:41
The RBD is not until 4/1/2012.
This is going to be a constant problem from now on, so perhaps client should determine how to restructure the IRA. If this partership is generating enough earnings he might just pay up the excess accumulation penalty. If the first RMD is 3.65% of the 12/31/10 balance the excess accumulation penalty paid with outside dollars would be 50% or 1.83% of that balance.
If he has any other TIRA accounts, he can satisfy the RMD for both of them from the other account.
The RMD for 2011 also depends on a fair market value of the partnership back on 12/31. What is the IRA custodian reporting for the value of the partnership? This could result in appraisal or accounting costs every year from here. If the IRA custodian is one of the large self directed IRA custodians such as Guidant or Pensco they should be able to make recommendations specific to the holding. They probably face the RMD issue as an ordinary daily challenge since many of their clients are probably RMD age. Client should probably have them look into the possibility of “in kind” distributions. An RMD does not have to be in cash, but I don’t know if an in kind distribution of partership interests is feasible.
The IRS will be going by the value on 12/31 and the 1099R distribution amount reported by the IRA custodian, so serious talks with the custodian are in order here.
Permalink Submitted by mk foss on Thu, 2011-08-11 00:01
In a case like this an interest in the partnership may have to be distributed. Assume that the IRA owns 18% of the partnership and the 18% interest is valued at $180,000. If the RMD is $9,000 – .05% of the partnership would have to be transferred to meet the RMD. The general partner of the partnership would have to be informed to change the ownership to 17.5% IRA and .5% IRA owner. It may require consent of the other partners to do this – so the IRA owner should start to explore the idea ASAP. Also in this situation, the custodian may need to sell a portion of the partnership interest to raise the cash for the RMD. It could not be sold to the IRA owner – that’s a prohibited transaction.