How to Take Your RMD When Your IRA Holds an Illiquid Asset

Friday, December 12, 2014

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

What happens if your IRA holds an illiquid asset and you are over age 70 ½? Can you skip the required minimum distribution (RMD)? The answer to that question is, no, you cannot skip the RMD. It is called a required distribution because the distribution is required.

You have three options for satisfying the RMD from the IRA with the illiquid asset.

  1. RMDs from IRAs can be aggregated. So if you have more than one IRA, you can calculate the RMD amount for each IRA and add them together. You can then take the required amount from any one or combination of accounts. This means that the RMD amount for the IRA with the illiquid asset can be taken from a different IRA that you own. Note: You cannot aggregate your owned IRAs with those of your spouse or with IRAs that you have inherited.
  2. You can satisfy an RMD by taking a distribution in-kind of a portion of the asset that is equal to or more than your RMD amount. If your RMD is 5% of your account balance, you can transfer 5% of the illiquid asset out of your IRA and have the asset retitled in your own name. The IRA custodian will issue a 1099-R showing the fair market value of the share that was distributed to you and you will owe income tax on that amount.
  3. This is the worst of the three options. You can skip the RMD. When you do not take the full amount of your RMD, the amount you do not take is subject to a penalty. Are you ready? The penalty is 50% of the amount not taken. That is not a typo. It is 50%. You report the penalty on IRS Form 5329. You can request a waiver of the penalty for good cause, but you can only do that after you have taken the distribution. This form is considered a stand-alone return. When it is not filed, the statute of limitations on the penalty does not start to run. The penalty, plus interest, plus failure to file penalties, plus accuracy related penalties can all be assessed years after the fact.

 

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