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IRA Required Minimum Distribution: You asked. We answered.

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  |  By Chris Shanahan, CISP®

One of the big advantages of saving for your retirement with a traditional self-directed IRA is that earnings and gains can grow tax deferred. However, you cannot keep those funds in your account forever, and traditional IRA owners must begin taking a yearly required minimum distribution (RMD) at age 70½.

For self-directed IRA investors who are new to the world of RMDs, we’ve answered six of the most frequently asked questions that we receive from clients when it comes their yearly IRA required minimum distribution:

1. When do I need to take my IRA RMD?

Required minimum distribution rules do not apply to Roth IRA accounts while the holder is alive. But starting at the age of 70½, investors who own a traditional, SIMPLE or SEP IRA are required to remove a portion of assets from their IRAs each year as a distribution.

Your first required minimum distribution must be taken by April 1 of the year following the year in which you turn 70½. For subsequent years, RMDs must be taken by Dec. 31.

2. What happens if I don’t take an IRA required minimum distribution?

There are significant penalties for not taking your IRA RMD during the correct timeframe. If you fail to take a required minimum distribution or you withdraw the incorrect amount, the amount you should have withdrawn is subject to a 50% excess accumulation tax. That is in addition to the regular income tax you owe on the distribution.

3. How do I calculate my IRA RMD?

That number is determined using the IRA's previous year-end account value, and dividing it by a "withdrawal factor" from a life expectancy table provided by the IRS to calculate required minimum distributions.

There are numerous online tools that can help you determine your IRA RMD. The IRS provides worksheets that can be used, while FINRA provides an RMD calculator.

The institution where you hold your IRA account will also be able to calculate your required minimum distribution. But it’s very important to remember that your IRA provider cannot see all of the IRAs you may own if they are held at other institutions. It's ultimately your responsibility to determine the total RMD amount that you are required to take for all of your accounts, and to ensure you take your RMDs annually as required.

4. Do I have to take an RMD from each IRA account?

No. If you have more than one traditional IRA, you have the option of taking your required minimum distribution from just one of your accounts or from a combination of them. Be sure, though, that you are meeting the total minimum distribution requirement for all of your accounts.

5. What about taking a required minimum distribution from my Roth IRA?

The required minimum distribution rules do not apply to Roth IRA accounts while the original account holder is alive.  However, there are required minimum distribution rules that apply to inherited IRAs, and that includes inherited Roth IRAs.

6. What if my self-directed IRA investments are illiquid? How do I take a required minimum distribution in that case?

For most traditional IRAs, the most common distribution method is cash, which means the account either has to have cash available or securities must be sold to fulfill the required minimum distribution. But many self-directed IRAs hold only illiquid assets because most alternative assets — including real estate — tend to be illiquid by nature.

As previously mentioned, if you have other IRAs that have cash or liquid assets, you could consider whether they contain sufficient cash so you can satisfy the RMD for your IRA that contains illiquid assets from one of those IRAs.  If that is not an option, the typical solution is to take a "distribution in-kind." 

For instance, if you own private stock and need to take a required minimum distribution but the stock cannot be sold for cash, you can take a distribution in-kind. This allows you to take your distribution in the form of shares of the private company stock rather than cash.  The shares equal or greater than the value of your RMD will be re-titled to you individually and the value of those shares will be reported as taxable income to you on IRS form 1099-R.

If your IRA owns real estate, and you have no other IRAs from which you can satisfy your RMD, you can also take a distribution in-kind, rather than being forced to sell the property. You can request that a percentage of the property—representing an amount of equal value to your RMD—be deeded to you individually, which effectively means your IRA will own part of the property and you will own the percentage that has been distributed.  

RMDs for self-directed IRA investors can be complicated and can also have severe tax consequences. To add insight into the process, we’ve written a series of blogs on RMDs:

For traditional IRA owners, RMDs are a fact of life after you turn 70½. But the good news is that there are options that can allow you flexibility to meet IRS requirements. It's always recommended that you consult with a tax or financial professional to determine which option(s) is most appropriate for your particular circumstance.

If you have additional questions regarding your required minimum distribution and your PENSCO self-directed IRA, you can contact us at 800.962.4238.

Editor’s Note: This is an updated version of a post we originally published in April 2015. We welcome new comments and questions below.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.