Non-liquid IRA investment
I have clients who have money in a non-liquid investment. It involves a lease on real estate in Cancun that was supposed to generate rental income. It’s not and the owner is in jail and charges are being filed by the Justice Department. The lease is held by a proper custodian, but since there is no rental income, there is no money for RMD’s.. They can’t get their money back because the guy in jail won’t give it back. It could be years before they get their money back, or worst case scenario, they may never get their money back
Are there exceptions to the RMD rules for folks like this?
Thanks,
Bruce
Permalink Submitted by Alan Spross on Sat, 2008-01-19 22:17
Relief from the excess accumulations excise tax is available for similar situations. Refer to Pub 590, p 57 for instructions how to go about requesting that the penalty be excused using Form 5329.
Also note under “Requirements” on that page that other IRA assets must be used to cover the shortfall from illiquid assets, since all TIRA accounts can be aggregated to meet the RMD requirement.
The IRA custodian should be attempting to place a year end fair market value on this lease for RMD purposes. Have they? If the process of determining that value causes a hardship or is grossly incorrect given the circumstances, perhaps the custodian will revise the value if such value creates an inflated RMD from other IRA assets available.
Permalink Submitted by Bruce Vangsnes on Sat, 2008-01-19 22:31
This is such a mess. I have told all of these clients to discuss this with their CPA’s or whoever does their taxes. Thus far, all of the CPA’s have told them not to worry about it even tho they have other IRA’s.
They do get statements from the custodian each year showing the value as being the original value they put in the lease. A case could be made for showing the value at zero, but i assume the danger in that is any recovery would be 100% taxable income. The government is in the process of negotiating some sort of settlement to recover proceeds for the afflicted and are confident something will happen.
Permalink Submitted by Alan Spross on Sun, 2008-01-20 00:21
Getting the IRS to waive the excess accumulation penalty will probably be the easy part. The other part of the problem is the inflated value showing up each year that will cause the RMD to be higher than that based on the actual undetermined value. The IRS will receive a 5498 each year showing the FMV for each of these years.
As a result, when the RMDs are finally brought current, even with the penalty waived, it will result in higher taxable distributions in total and a loss of tax deferral as well as possibly inflating the marginal bracket in the year RMDs are brought current.