The Real Estate IRA Investor and RMDs
For investors who own traditional IRAs, required minimum distributions (RMDs) become a fact of life once you hit the age of 70½. RMDs are the minimum amount that must be withdrawn from an IRA every year. While investors typically satisfy their RMDs using cash from an IRA, RMDs can be a bit trickier for investors whose traditional IRA is self-directed, and the IRA is invested in an illiquid asset like real estate.
Here is some information for investors who own real estate in their self-directed IRA and have questions about how to handle RMDs:
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 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.
I directly own real estate in my self-directed IRA, and I do not intend to sell the property. How can I take an RMD in this case?
Luckily, the government does not require you to sell the property, which could result in an unwanted tax hit to your IRA if the property was leveraged. While the most common distribution method for satisfying RMDs is a cash distribution, someone may prefer a "distribution in-kind."
You are permitted to distribute part of the property to yourself via grant deed, which effectively means your IRA will own part of the property and you will own the percentage that has been distributed. It is very important that you ensure that the proportional expense payments are paid separately. Before you request such a distribution, your custodian may require that you provide a current appraisal of the property so it may properly report the value of the portion of property being distributed in-kind.
For example, say your IRA owns 100% of a piece of property that's worth $100,000, and your RMD is $10,000. You can distribute $10,000 worth of that 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 also work for mortgage-backed notes, where the custodian writes a partial Assignment of Deed of Trust/Mortgage to the account holder personally for the amount of the RMD.
What if I have multiple IRAs?
If you have multiple IRAs, you must calculate the RMD for each account you own. However, you can take your distribution from only one or more than one of those accounts. Just be certain to take the total RMD required. (There are multiple RMD calculators available that can help you determine the amount you need to distribute).
This means that if your self-directed IRA is invested solely in illiquid real estate but you have enough cash or 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 real estate.
What if I own the real estate in my self-directed IRA in partnership with another person or partnership?
In these circumstances, a proportionate interest in your IRA can be deeded to you by your account. When this happens, the portion of the property deeded to you will then be counted as your personal property.
However, if you own real estate in partnership with a limited or general partnership, the partnership may have rules regarding what is allowed as a distribution. It is best for you and your financial advisor to consult your partnership agreement to determine how the partnership allows you to take a distribution.
When should I request my RMD?
While you may not need to take your first RMD until April or you are facing a yearly RMD deadline of December 31, it’s never a good idea to wait until the last minute to request an RMD.
Your custodian will need time to process a request to distribute property in-kind. You will need to submit your distribution request along with an appraisal of the property being distributed. This may involve changing the title of the asset to your name.
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. 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. You must also remove the amount you did not take to avoid an accruing penalty.
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 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.