Options for Taking An RMD When Your Account is Illiquid

Options for Taking An RMD When Your Account is Illiquid


2023 brings changes to the Required Minimum Distribution rules, such as anyone under 70.5 may now wait until they turn 73 to begin taking mandatory withdrawals from their pre-tax retirement plans. One thing that has not changed is the 50% penalty for not taking a timely RMD. As an IRA custodian that specializes in holding alternative investments, many of our clients hold illiquid assets. If you are a client that needs to take an RMD but finds yourself with insufficient cash in your account, you still have options.

Plan Ahead

First, if you are new to self-directing your IRA, consider leaving sufficient cash reserves in your account when making an investment. Many alternative investments have related expenses that should be paid out of the undirected cash in your account and the administrative fees associated with managing your account.

If this is not an option, then this next suggestion may be useful. Do you have another pre-tax retirement plan with cash or assets which can be easily liquidated? You are not required to draw your RMDs from each account you hold; instead, you can take your entire RMD from another account you hold.

Find An Alternate Route

If you do not have another plan to withdraw from, then you may want to consider taking a non-cash or In-Kind distribution. For example, if your Midland account holds Real Estate, you can distribute a part of, or the entire title to, the property.

Here is a detailed example of this scenario:

Bob is required to withdraw $10,000 as an RMD. He holds real property in his IRA that is worth $50,000.00. Bob provides Midland with a certified appraisal to authenticate the property value and has a Quit Claim Deed prepared, effectively changing the title from sole ownership to tenants in common. The Quit Claim Deed will re-register 20% to Bob as an individual, while the IRA retains 80% ownership of the property. Midland will report to the IRS on a 1099-R that Bob took a distribution in the amount of $10,000. Bob’s RMD will be satisfied.

Sell An Asset

Another option to consider is selling an asset. The proceeds from the sale will return to the IRA, tax-deferred, and only the amount withdrawn will become taxable.

Take the 50% Penalty

Finally, as a last option, an account holder may choose not to take the distribution. If an account holder opts out of taking an RMD, the penalty is 10% of the amount not taken. Here is an example:

Susan is required to withdraw $3,000.00 as an RMD. Her asset could be costly to re-register, so she decides not to take an RMD. Susan will have to pay $300 to the IRS when she files her taxes for not taking her RMD. The asset will remain untouched in the IRA.  

It’s Up To You

Ultimately, the way that assets are distributed is up to you. These are just a few ways to distribute cash and assets from your account, but as always, you should consult your CPA or tax advisor about your specific situation.

Midland offers an RMD Calculator to make this process easy for our clients. For questions or more information regarding RMDs, please get in touch with Midland Trust at (239) 333-1032 or visit www.MidlandTrust.com.

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