Taking an RMD When Your IRA Has No Cash

Do you have a Traditional IRA? If so, you’ll have to start taking Required Minimum Distributions (RMDs) eventually. Once you turn 70 ½, you’re required by the IRS to take out (and pay taxes on) a portion of your retirement savings. But for some people who don’t hold any cash in their self-directed retirement account, this causes momentary panic. I don’t have any cash in my self-directed IRA, how do I take my RMD? What do I do!?  

Never fear, IRA investor— you have some choices, even if you’re just about to turn 70 ½.

Here are the 3 easiest:

Required Minimum Distribution From Another Retirement Account

The simplest option is to just take your required minimum distribution from another retirement account. Your RMD is calculated by looking at all of your retirement accounts, across providers, and you can take the funds from just one account. You don’t need to take a little bit from each retirement account, just your full RMD amount from one of your accounts.

So say you have a retirement account holding stock at a big bank— come RMD time, though your total includes your self-directed assets, you can liquidate some stocks and take the entire distribution from that account. This is the simplest and fastest way to take your RMD.

In-Kind Distribution

If you don’t have the option to (or just don’t want to) take your RMD from another retirement account, you’re able to take an in-kind distribution and have it count as your RMD. This means you’re distributing all or part of your asset to yourself personally, without selling the asset.

You can distribute your entire asset to yourself, or just enough of the asset to cover the RMD amount. To do that with IRAR, you’d complete a Distribution Form and a Fair Market Valuation Form showing the value of the asset you’re distributing (valued by a qualified 3^rd party— you may not provide valuation of your own assets). You must then get the asset re-registered to reflect the new ownership percentage.

Many investors do this process slowly over many years to satisfy their RMD.

For example, say your IRA owns a rental property worth $100,000 and your RMD for the year is $10,000. You can decide to distribute 10% of your rental property to satisfy that requirement. You’d get the asset valued by an independent 3^rd party and submit the Fair Market Valuation and Distribution forms to IRAR. We’d process the distribution, and you’d get the deed rerecorded to read IRAR Trust Co FBO Client Name & Account Number 90% and Client Name 10% undivided interest.  

Remember that even though you distribute your asset(s) in-kind, you still owe taxes on those assets (so plan for that come tax time).

Sell The Asset

Of course, you can also go ahead and sell the asset if that’s what you want. This is the most straightforward choice. You should go about the process of selling the asset as normal, giving enough time for all of the typical paperwork and coordinating. Once your asset has been sold and the funds have been received, then we can process your required minimum distribution. Submit both forms at once to speed up the transaction.

Consequences If You Don’t Take Your Required Minimum Distribution

If you don’t take your RMD by the deadline (12/31, unless this is your first RMD), you can impact the tax status of your account and incur some hefty penalties. Most notably, any amount you didn’t take is subject to a 50% penalty— so if your required minimum distribution for the year was $10,000 and you forgot to take it, you’d be hit with a $5,000 penalty.

But, if you missed the deadline you aren’t quite out of luck— there are ways to fix this before the IRS comes for your retirement savings.

Did You Just Turn 70 ½?

If you just turned 70 ½ and you’ve missed your first RMD deadline, you’re in luck— the IRS gives first time RMD-takers until the April 15^th of the year AFTER they turn 70 ½. So, if you turned 70 ½ this past March, you have until NEXT April 15^th to take your RMD. However, you’ll need to take two RMDs that year— double RMD to make up for the year you skipped.

The first step if you missed your RMD deadline is to recalculate and confirm you’re distributing the right amount— if you pay less than required, the remaining amount is still subject to that 50% penalty.

Once you’ve confirmed your RMD amount, immediately withdraw that amount from your IRA.

Then, complete and submit Tax Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. This can be submitted alone or with your tax return. If you are requesting the 50% penalty be waived, you do not have to submit payment with your form. Include a letter explaining you’ve missed or incorrectly taken RMD, why you’ve missed the distribution, and what steps you have taken to correct it.

The IRS grants waivers for “reasonable error”, and though there is no official list of what is considered reasonable, they’ve been known to grant waivers for illnesses, deaths in the family, and inaccurate advice from advisors. If granted, the IRS typically sends notice within a few months.

In A Nutshell

If you have a Traditional IRA, you have to take an RMD— but it doesn’t have to be a headache, even with assets not so easily liquidated like real estate, tax liens, or promissory notes. You can take your RMD from another retirement account, take the distribution in-kind, or if all else fails, you can always sell your asset and take your RMD from the proceeds. Either way, IRAR is here to help as needed. If you have any questions, reach out to one of our CISP certified team members.