Illiquid IRA and RMD requirements
A colleague’s client has an illiquid IRA with no cash availability and is 71. He needs to take his RMD… what can he do? A prior advisor (now deceased) converted the cash in his IRA to a Roth IRA 3 or 4 years ago so now he has no cash to pay his RMD’s with. Any ideas??
Permalink Submitted by Alan - IRA critic on Tue, 2015-03-31 18:17
Taxpayer may have to look into partial in kind distributions to satisfy the RMD each year. Custodian of the IRA must now report the type of investment to the IRS on Form 5498 and make an effort to establish the value at the end of every year. Taxpayer may have to sell all or part of this investment as the RMDs will just grow each year. The prior advisor converted the wrong portion of his IRA.
Permalink Submitted by Suanne Jones on Tue, 2015-03-31 18:46
Thank you Alan. He cannot sell the investment at this time… he has to wait approximately 2-3 years for liquidation. I will see if he can do an in kind distribution.
Permalink Submitted by Jose Morales on Tue, 2015-03-31 20:53
A 50% excess accumulation penalty will apply to any RMDs not taken. Although the IRS has been more reasonable with waiving the penalty when circumstances warrant a waiver (such as a medical emergency that prevents someone from taking their RMD) the fact that the account is illiquid most likely will not present a compelling case for a waiver. Having a self directed IRA comes with tremendous responsibility on the part of the IRA owner to have these sort of issues worked out before they come up, although Custodians of IRAs with these types of investments really should have a moral obligation to be more proactive in either filtering out those not up to the task of holding alternative assets in their IRA or educating those that do.