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The Private Stock IRA Investor’s Guide to RMDs

Dollar Bills in Piggy Bank

  |  By Christopher Orr, SDIP

One of the perks of growing your retirement nest egg using a traditional IRA is that the holdings can compound year after year on a tax-deferred basis, and one of the perks of saving for retirement with a traditional self-directed IRA is that you can grow that nest egg by investing in alternative assets, such as private stock.

These IRA investments can grow tax-deferred until required minimum distributions (RMDs) must start when you turn 70½. RMDs are the minimum amount that must be withdrawn from your IRA every year. While investors typically satisfy their RMDs using cash from an IRA, RMDs can be a bit trickier for self-directed IRA owners if your IRA is invested in an illiquid asset such a private company stock.

For investors who own private stock in a self-directed IRA, the following information explains how one might handle required minimum distributions:

When do I need to start taking RMDs?

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.

I own private stock in my self-directed IRA. How can I take an RMD?

The most common distribution method for taking an RMD from an IRA is cash. If your private company stock can be sold, you can sell a portion of your holdings to satisfy your required minimum distribution.

However, as is the case with many alternative investments, private company stock cannot always be easily sold and converted into cash. In this case the typical solution for an investor who owns private stock and needs to take an RMD is to take a "distribution in-kind." This means you will take your RMD in the form of the private stock company rather than cash.

To do this, your custodian will request that the company or its transfer agent re-register part of the stock in your self-directed IRA to you personally. While your IRA continues to own a portion of the private stock, you will take ownership of the shares that have been distributed to you via the re-registration. By having your self-directed IRA custodian assign all or a portion of the private stock to you personally, you can satisfy your RMD for the year.

How do I handle RMDs if I have multiple IRAs?

If you have more than one IRA, you must calculate the RMD for each account you own. However, you can decide to take your distribution from only one account or from multiple accounts. Just be certain to take the total RMD required. (RMD calculators are available that can help you determine the amount you need to distribute).

This means that if your self-directed IRA is invested solely in private stock but you have enough cash or liquid stock in other IRAs to cover your yearly RMD, you can use those assets to take your full RMD. This would avoid the need to take an in-kind distribution from the self-directed IRA that owns private stock.

When should I request my RMD?

Whether you are facing a yearly RMD deadline of Dec. 31 or you will need to take your first RMD next April, it’s never a good idea to wait until the last minute to request an RMD. Your custodian will need time to process your distribution request and make the actual distribution to you. In addition, the issuer of the private company stock may need considerable time to process the registration change. Some issuers only process registration changes once a month or even quarterly. If that’s the case, your registration change might need to be submitted by September for a December distribution. Check with your issuer for their instructions and deadlines. Be sure to build in extra time for this process so any unanticipated delays do not push you beyond the distribution deadline.

What happens if I forget to take my RMD?

There are penalties for forgetting to take an RMD. RMDs that are not paid out in the year in which they are due may be subject to a 50% excise tax on the amount not distributed as required. These are called excess accumulations.  For instance, if your RMD is $10,000 and you only take out $5,000, you may be required to pay excise tax of $2,500—half of the amount that was not distributed.  The penalty on excess accumulations accrues each year until the amount required to be withdrawn is removed.

RMDs and your IRA

If you hold a traditional, SIMPLE or SEP IRA, RMDs should be included as part of your overall tax planning. It’s always best to work with a financial advisor or tax advisor to ensure you are meeting your minimum distribution requirements while also meeting your retirement investment goals. If you have questions about taking an RMD from your PENSCO self-directed IRA, you can contact us at 800.962.4238.

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.