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Required Minimum Distribution (RMD)

What is a required minimum distribution (RMD)?

An RMD is the minimum amount that the IRS requires you to withdraw from your IRA each year, usually after you turn 70½. The exact amount changes from year to year based on a number of factors (see below).

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Are self-directed IRAs subject to RMDs?

RMDs apply to Traditional, SEP and SIMPLE IRAs, whether they are self-directed or not.  Roth IRAs (self-directed or otherwise) do not require RMDs until the death of the owner.

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When do I need to start taking RMDs from my self-directed IRA?

In most cases, you’re required to take your first RMD by April 1 of the year following the year you turn 70½. After that, each yearly RMD must be taken by December 31.  For example, if you turn 70½ in 2015, you’ll need to take your first RMD by April 1, 2016 and your next RMD by December 31, 2016.

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How do I calculate my RMD?

Your RMD is based on your account balance from December 31 of the year that precedes the year you’re taking the distribution. That number is then divided by the amount indicated in the IRS’s “Joint Life and Last Survivor Expectancy Table” (if your spouse is the sole beneficiary and is more than 10 years younger than you) or the “Uniform Lifetime Table” (for everyone else).

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What if I have IRAs at multiple firms?

You must calculate the RMD for each account that you own, but you can withdraw the total amount from just one or more than one—as long as you take the total amount.   

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Can PENSCO calculate and distribute my RMD for me?

PENSCO is happy to help you calculate the RMD for the accounts you hold with us.  However, since we can’t see the accounts our clients hold with other institutions, it’s ultimately your responsibility to determine the total RMD amount for all of your accounts. For obvious reasons, we’re unable to process any distributions without express consent from the account holder, but we’ll do our best to remind you of important RMD dates.

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How are RMDs treated for tax purposes?

For most IRAs, distributions are treated as taxable income.  For Roth IRAs, distributions are generally tax-free.

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What happens if I don’t take my RMD?

If you fail to take your RMD or if you take less than the minimum amount, you may be subject to a 50% excise tax on the amount not distributed as required. For example, if your RMD is $5,000 and you only take out $2,000, you may be required to pay excise tax in the amount of $1,500—or half of the amount that wasn’t distributed.

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Does an RMD apply to me if I only have real estate in my IRA?

There’s a little-known RMD rule that may allow you to take the distribution in-kind. This is a common solution for our account owners who hold real estate in their PENSCO IRAs, since it’s problematic to partially liquidate this kind of investment. The IRS will allow you to distribute part of the property to yourself via grant deed, which essentially means that your IRA owns part of the property and you personally own the part that’s been distributed. This method can also work for mortgage-backed notes using a partial assignment of deed of trust/mortgage. You can read more about in-kind RMDs on our blog.

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What if I don’t have enough cash in my self-directed IRA to cover the RMD?

If you don’t have enough cash to cover the RMD in one IRA, you generally have three options to choose from:

  1. Take the total RMD amount from your other IRA accounts and leave your self-directed IRA intact.
  2. Liquidate assets in order to make the distribution (works best with exchange-traded assets like stocks, bonds, ETFs and mutual funds).
  3. Take the distribution in-kind (see answer to previous question).  

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