3 RMD Solutions for Illiquid Investments Within an IRA


By Jeffrey Levine, IRA Technical Expert
Follow on Twitter: @IRAGuru4EdSlott

It makes absolutely no difference what investment or type of investment you own within your IRA. There is no exception, whatsoever, when it comes to required minimum distributions (RMDs). Once you reach 70 ½, RMDs must be taken one way or another, or else you’re going to be subject to the 50% penalty for failing to timely take an RMD.

If you hold illiquid assets inside an IRA, here are three potential solutions to consider that can be used to help you avoid any RMD problems once you turn 70 ½:

  1. Use other IRA money to “make-up” the difference. Suppose, for a moment, that you own a piece of real estate inside your IRA, which is certainly the most common type of illiquid asset that we see being held inside an IRA. Let’s also imagine that the property is valued at $100,000 and, based on that amount, you’ve calculated an RMD of $5,000. Now imagine that you also have $100,000 in another IRA that’s in cash liquid investments. Obviously, the same RMD of $5,000 would be calculated for that account, since they are both worth the same $100,000. Since both accounts are IRAs (and only since both accounts are IRAs), the cumulative RMD amount, $10,000 in this case, can be taken from just one of your IRAs. So in this case, to avoid penalties, you could take $10,000 out of just the IRA with the liquid investments, which would satisfy the RMD requirement for both IRAs and steer you clear of any RMD penalties
  1. Convert the IRA to a Roth IRA prior to the year you reach 70 ½. Roth IRAs don’t have required minimum distributions during a your lifetime, so they can be very useful tools when it comes to dealing with illiquid assets inside an IRA, especially if you have no other IRA money to utilize the first approach discussed above. Of course, once you pass away, any non-spouse beneficiaries, like your children, will need to begin taking RMDs from the inherited Roth IRA account, so they would be faced with the same issue with fewer potential solutions at their disposal.  Although if the same beneficiary inherited two Roth IRAs from the same person, and one was illiquid and the other was not (like the example above) then that beneficiary can take the RMD for both inherited Roth IRAs from the liquid inherited Roth IRA. But that is only because they were inherited from the same person.
  1. Distribute portions of the asset in kind. This is easier to do to with some illiquid assets than others. For instance, if you own shares of a privately-held company inside your IRA, but can’t sell the shares, you could distribute a portion of the shares, in kind, to a taxable account. The fair market value of the distributed shares would be taxable to you and could be used to satisfy an RMD requirement. Of course, this is harder when it comes to real estate. If you own just a single home inside your IRA, what are you going to do? Distribute the bathroom one year? The dining room the next? You get the point.

Remember, IRAs and other retirement accounts are different from just about every other asset you might own and present unique planning challenges. The RMD requirement is just one of those differences that you must plan for ahead of time to avoid costly penalties that could derail your retirement. 

If you are subject to RMDs (or will be soon), either as an IRA owner or beneficiary, it is best not to have all your IRA funds invested in illiquid assets. Always have some liquidity in your IRA.


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