IRA that cannot make RMD
Hello,
I have a client with an IRA that contains illiquid mortgage trust deed investments. The client needs to take an RMD but is unable to do so. How are situations like this handled for RMD purposes? As I understand it, the client still needs to report the RMD for tax purposes as though it were taken even though they will not receive a distribution from the account. Is this correct?
Thanks,
RA
Permalink Submitted by Alan - IRA critic on Tue, 2014-07-08 01:23
No. An RMD is not reported unless it is actually distributed from the IRA. And not distributing it exposes the IRA owner to the 50% excess accumulation penalty. An RMD can be taken in kind which means that if the deeds can be distributed out of the IRA to the client, his RMD is deemed completed. Another possibility is selling the deeds in the IRA to free up cash for the RMD. Client has 6 months to complete this process, but if it take longer and does not get done until next year and the delinquent RMD is taken right away next year, there is decent chance that the IRS will waive the penalty if a proper 5329 is filed requesting the waiver for reasonable cause.
Permalink Submitted by Richard Alpert on Wed, 2014-07-09 20:21
Thanks for the response. Selling the deeds to free up cash is not currently a possibility. Regarding an in-kind distribution, it it is handled this way, then the RMD is deemed to be completed resulting in a taxable event for the client even though she has received no $ due to continuing illiquidy of the deeds, correct? Just want to make sure I understand this fully. Thanks,RA
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-09 22:03
Yes. The IRA custodian that distributed the deeds must determine the value of them at the time of the distribution and issue a 1099R reporting the distribution to the client and the IRS. The 1099R looks the same as if cash had been distributed and it does not indicate the type of asset that was distributed. There might be some technical issues in distributing a portion of a deed in the same manner that a custodian would distribute a fractional share of a mutual fund. An IRA custodian that allows deeds in their IRAs should be able to provide some advice on this matter.