Illiquid IRA Assets and Satisfying Your RMD

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

An advisor called about a client who has a bond in his IRA that is in default. He has not taken his required minimum distribution (RMD) from that IRA account for the last three years because the bond is illiquid at this point in time. He does have other IRAs.

You cannot ignore the RMD rules. IRS is notified when an individual has an RMD. This client had options for satisfying his RMD.

One option was to take an in-kind distribution of all or part of an illiquid asset to satisfy the RMD. The asset will be valued at the time of the distribution so be sure to take it early enough in the year to allow time for the valuation and to make any adjustments, if necessary. An RMD can also be satisfied from another IRA that you own.

The only time you do not have to take the full RMD for the year is when the IRA account value drops below the amount of the RMD. Then you empty the account to satisfy the RMD. There is no penalty in this situation.

Any time all or part of an RMD is not taken, there is a penalty of 50% of the amount not taken. That is not a typo. The penalty is 50%. IRS has the authority to waive the penalty for good cause, but you have to ask them to do this. You must file Form 5329 with your tax return to report the missed distribution. Attach a letter requesting a waiver. Be sure that the form ends up with a zero as the amount to pay.

IRS has put IRA custodians on notice that they are required to report the fair market value of all IRA assets, including those that are hard to value. When an in-kind distribution is made of an asset, the IRA custodian must note on Form 1099-R when the asset is a hard-to-value asset. When these assets are rolled over to another IRA or converted to a Roth IRA, the receiving custodian must note on Form 5498 that the asset is a hard-to-value asset.

IRS has a vested interest in knowing about hard-to-value assets. They want to be sure that the proper amount of tax is collected on distributions and conversions. They also want to know that the correct amount of an RMD is taken by those that are in payout status – again so that the correct amount of tax is paid.

However, this can also work in a taxpayer’s favor when the asset has declined in value. Since the IRA custodian must report an accurate value, they now have more of an incentive to work with IRA account owners to be sure that assets that have declined in value are accurately valued in the account. But this still will require a valuation or adequate documentation before the custodian can, or will be willing to, adjust the value. The cost of an asset valuation is a cost to the IRA. It cannot be paid by the IRA owner out of personal funds.

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