RMD
I have to take my RMD out of my IRA this year. I own an LLC only in the IRA. Can I take a percentage of the LLC as a distribution? Will this be a prohibited transaction because my IRA now owns 90% of the LLC and I own 10% myself?
I have to take my RMD out of my IRA this year. I own an LLC only in the IRA. Can I take a percentage of the LLC as a distribution? Will this be a prohibited transaction because my IRA now owns 90% of the LLC and I own 10% myself?
Permalink Submitted by Alan Spross on Sat, 2012-08-04 04:27
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In a self-directed IRA context, the RMD rules can cause particular difficulties. Assuming the IRA consists of pre-tax funds, the account holder must begin taking RMDs on a yearly basis starting at age 70 ½. In other words, the RMD rules apply to self-directed IRAs the same way as any other IRA. If the IRA’s assets consist of real estate, privately-held business interests, or other “illiquid” assets, it is possible for the account holder to be required to take a distribution, but the IRA to have no cash. In these situations, the IRA account holder is left with the following options: (1) take his or her RMD from a different IRA of the same tax character (assuming the distribution is sufficient to cover the RMD for all of the account holder’s IRAs); (2) have the self-directed IRA distribute an illiquid asset directly to the account holder, which will likely result in a large income tax bill but no cash [e.g. a $200,000 piece of real estate being distributed out of a pre-tax IRA will result in a $56,000 tax bill (assuming 28% tax bracket), but no cash to actually pay the tax]; or (3) face the daunting 50% excise tax for failing to take the RMD.
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If the IRA holds real estate, a quit claim deed for the share equal to the RMD would probably work. But best to avoid getting into this position in the first place. If you DO have another IRA you can satisfy the RMD for both IRAs from the other IRA and this is the best solution. It would also provide the cash you need to pay the tax bill on the RMD.
Permalink Submitted by Marianne Chopp on Tue, 2012-08-07 17:30
The IRA holds an LLC, not real estate so a quit claim deed would not work here.
Permalink Submitted by Alan Spross on Tue, 2012-08-07 18:42
Sharing an investment ownership with your IRA is not itself a prohibited transaction, but it does set you up to possibly make a commingling error in the accounting or other infraction later on. You would have to keep all transactions totally separate, eg if you have an expense to pay you would have to pay 90% of it from your IRA checkbook and 10% from your personal checkbook so you are not self dealing with your IRA.
Asking this question, I assume you are not using a self directed IRA specialist custodian. Many of them promote these IRA LLCs and they obviously have to satisfy RMD requirements, year end valuation requirements on which the RMD is based etc. I can’t help you with the actual mechanics of division between the IRA and your distributed portion which would expand each year through the RMD, but I assume these custodians handle thousands of LLC RMDs annually. You may have to contact one of them to make sure you do it correctly.
Or perhaps anyone who uses such a custodian for an IRA LLC can indicate how they handle the RMD mechanics so that various state LLC requirements are not violated.