Unpriced Assets and RMD
I am trying to determine the 2012 RMD for a client who has a non publicly traded REIT in their IRA account. The custodian is not pricing the asset on the brokerage statement and only shows the cash in the account. The non priced REIT represents 98% of the total value of the IRA (using the per share value last shown by the custodian before they decided to no longer show a value)
Subsequent to 12/31/12 the non publicly traded REIT was acquired for certain amount of cash per share and preferred stock in a privately held company with a 7 year lockup. Again no valuation is being made by the custodian of the preferred shares so this problem will persist going forward.
Question: How do I determine the 2013 RMD if there is a non priced asset at 12-31-12.
Thanks
Howard
Permalink Submitted by Joe Luby on Wed, 2013-10-30 14:14
Howard,I am involved in a case that very likely pertains to the same asset and firm that you’re referring to in this post. I have detailed information that should be helpful to you and your client and would appreciate a chance to discuss the same.Please contact me at [email protected] and let me know a good time for a conference call discussion.Thank you,Joe
Permalink Submitted by Jose Morales on Wed, 2013-10-30 15:51
The IRA Custodian doesn’t have the option of whether or not to provide a fair market value of the assets in the IRA is holds, it is mandatory with no exceptions. If the assets it allowed the IRA Client to hold are hard to value, that is their problem to deal with once it was allowed in their custody. The client’s RMD for 2013 is going to be based off of the value provided on the 5498 by the custodian, as that information is supplied to the IRS. If they provided an incorrect 5498 it needs to be brought to their attention for correction.
Permalink Submitted by Bruce Steiner on Thu, 2013-10-31 03:22
If that asset is 98% of the IRA, you’ll have to use it to satisfy the required distribution. Until you resolve the valuation, the simplest thing would be to take a pro rata portion of the required distribution in kind from that asset. In other words, if the IRA is $1 million of which that asset is $980,000, and the required distribution is $50,000 (which is 5% of the total value), you could take 5% of that asset ($49,000 worth of it) and 5% of the other assets ($1,000). That way, regardless of the value of that asset, you will have taken the correct amount.
Permalink Submitted by Joe Luby on Thu, 2013-10-31 19:01
The two previous comments are both correct. Hopefully, my comments below will add to the discussion. The methodology cited above is widely circulated as a solution for satisfying RMDs when there is insufficient cash availble in the IRA (i.e., distribute assets in-kind proportionate to the RMD). It is a correct and viable option in those situations. The problem which remains in the case described in the original post is that the taxpayer has traded one IRS problem (inadequate RMD withdrawal) for another (underreporting of taxable income). The RMD calculation rules do not provide for a strict percentage withdrawal calculation, rather, they mandate that a certain dollar amount be withdrawn and reported as taxable income. Said dollar amount is calculated by dividing the 12/31 FMV by the applicable factor from the appropriate IRS table. Thus, using the example described above, and assuming the $1 million IRA value was the last known valuation, the account would be showing a 12/31 FMV of only $20,000. Therefore, satisfying the RMD based on the formula of dividing the FMV by the applicable factor would be accomplished by removing perhaps only $1,000 or so depending on the age of the taxpayer. However, anyone reviewing the transaction would quickly see that the account contained substantially more assets in the form of shares of an asset that were somehow (conveniently, perhaps) not valued. As discussed, the taxpayer solves this problem by removing a pro rata number of shares of the unvalued asset. At that point, at least in form if not substance, the taxpayer has satisfied their full RMD by accounting for all of the assets in the IRA when taking the withdrawal (even though the RMD calculation rules do not require this approach). Unfortunately though, removing shares of an asset showing no valuation results in an underreporting of taxable income. The IRS will rightly argue that such shares had some measure of value that just hadn’t been determined yet by the time of distribution. The 1099 reporting the taxable income resulting from the RMD would only reflect the $1,000 of known value even though shares of another unvalued asset were distributed at the same time. At some point the taxpayer would be held accountable for the tax due on the unvalued assets distributed and will also likely be hit with penalties and interest for the underreporting. This highlights the importance of ensuring proper valuation of all assets in the IRA prior to calculating the RMD or taking a distribution which will be reported on Form 1099.