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There is More Than One Way to Skin a RMD

A house built with hundred dollar bills

  |  By Chris Shanahan, CISP®

Most traditional IRA owners are familiar with the concept of a required minimum distribution (RMD) – and if not, they should be. Starting at age 70.5, account holders are required to remove a portion of assets from their IRAs each year as a distribution. It’s important to note that in most cases RMDs only apply to traditional IRAs, not their Roth IRA counterparts.

If you use a self-directed IRA to invest in real estate, the RMD rules and nuances are, for the most part, the same as they are for traditional IRAs. For example, the first distribution must be taken by April 1st of the year following the year in which you turn 70.5, but for all subsequent years distributions must be taken by December 31st. For example, if you turned 70.5 in 2013, you have until April 1st, 2014 to take your first distribution and December 31st, 2014 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%.

Another similarity is the way that the distribution amount is calculated. For both traditional and self-directed IRAs, the number 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. There are many calculators out there that can help you predict your next RMD, but the institution(s) where you hold your account(s) will also do it 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 of your 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 distribution. 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 RMD and leave your other account(s) alone.

The ‘In-Kind’ Method:

But what happens if your IRAs hold 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.

Whether you hold a traditional or self-directed IRA (or both), RMDs are a fact of life – and one that should be taken seriously. The good news is that there are a few options available that can allow you to meet the IRS regulations without compromising your investment strategy. Talk to your financial professional or institution to find out if one of these options will work for you.


The PENSCO 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.