Illiquid IRA

Submitted by Bob Foland on Thu, 2017-02-02 15:56

Client, Brad, has converted all of his traditional IRA to a Roth with the exception of a bond whose issuer has defaulted. Despite the default, the bond is still held by his broker-dealer and is reported at face value. He can’t sell it and has no other funds in the IRA. As it is reported by his broker-dealer, it would seem to require a minimum distribution, but is has no value. What is he to do?



Submitted by Alan - IRA critic on Thu, 2017-02-02 17:26

  • His other considerations should also factor into this. What value did the IRA custodian place on the bond at year end 2016?  That is what will be reported to the IRS on Form 5498 later on. If it is low enough and recognizing that his RMD is probably less than 10% of this value, he could just distribute the bond to his taxable account. On the other hand, if the value is too high he could forget the RMD until this is resolved, then make up any late RMDs and ask for a penalty waiver for reasonable cause. It will also certainly be granted in this situation as long as he has some documentation that it is illiquid.
  • If he does not want to go with that and if he did a 2016 conversion, he could recharacterize enough of that to fund his RMD, but he really needs to know what year end value has been placed on this bond to get some actual numbers to work with. I assume he has already considered asking the broker to buy the bond from him for near nothing just to clear up this mess.


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