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An RMD Deadline Looms for Some IRA Holders


  |  By Chris Shanahan, CISP®

The clock is ticking down on 2015 and that means a key tax deadline looms for many retirees who own IRAs and must take a required minimum distribution, or RMD.

Starting at age 70½, account holders are required to remove a portion of assets from their IRAs each year as a distribution. These are referred to as RMDs, and in most cases they only apply to traditional IRAs, not their Roth IRA counterparts.

If you use a self-directed IRA to invest in real estate or other alternative assets, the RMD rules and nuances are, for the most part, the same as they are for traditional IRAs. For example, the first RMD must be taken by April 1st of the year following the year in which you turn 70½. For all subsequent years required minimum distributions must be taken by Dec. 31st. But RMD rules can be a bit confusing and should be included as part of your yearly tax planning.

For example, if you turned 70½ in 2015, you have until April 1st, 2016 to take your first required minimum distribution and Dec. 31st, 2016 to take your next one. There are significant penalties for not taking your RMD during the correct timeframe, including potentially having the non-distributed portion taxed at 50% (excise tax)

If you miss your RMD payment, Mike Branch, a certified financial planner with Focus Financial, offers five steps you can follow to try to remedy the situation, while Jim Blankenship of Blankenship Financial planning wrote this blog post on what to do when you realize you’ve made an RMD error. But it’s best to arm yourself with as much knowledge as possible about RMDs to avoid any mistakes.

The required minimum distribution is determined based on the account holder's age, the IRA's previous year account balance, and a "withdrawal factor" that is primarily based on life expectancy. For tax planning purposes, there are many RMD calculators online that can help you determine your distribution, including this RMD calculator from Bankrate and this RMD calculator from FINRA.

The institution(s) where you hold your account(s) will also calculate your RMD for you. However, institutions can't see all the IRAs you may hold in other places, so it's ultimately the account holder's responsibility to determine the total RMD amount for all accounts.

The ‘You Choose' Method:

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 in order to fulfill the RMD. If you have multiple accounts, you can take all or part of the total distribution from any account you choose — so if one IRA has more cash than another one, you can rely on it for your required minimum distribution and leave your other account(s) alone.

The ‘In-Kind' Method:

But what happens if your IRA holds only illiquid assets? This is a question that comes up repeatedly with self-directed IRAs because most alternative assets — including real estate — tend to be illiquid by nature. The typical solution to this is a little-known RMD option: take the "distribution in-kind".

For example, let's say you own 100% of a piece of property in your IRA that's worth $100,000, and your RMD is $10,000. You can distribute $10,000 worth of said property to yourself via grant deed. Essentially, your self-directed IRA custodian assigns that portion of the property to you personally, and that would satisfy your RMD for the year. This can work for mortgage-backed notes as well, where the custodian writes a partial Assignment of Deed of Trust/Mortgage to the account holder personally for the amount of the RMD.

If you hold a traditional IRA, RMDs are a fact of life. They should be included as part of your overall tax planning and options are available that can allow you to meet the IRS regulations without compromising your investment strategy. Talk with your financial professional or institution to find out if one of these options will work for you.

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.

Editor’s Note: This is an updated version of a post we originally published in November 2014. We welcome new comments and questions below.