Taking a required minimum distribution (RMD) can be challenging if you’re not sure what you’re doing. There are real tax consequences if you don’t do it right, so smart IRA investors know it’s important to take it seriously. Since self-directed IRAs deal with alternative and sometimes illiquid assets, this can seem complex. But at IRAR, we’ve seen it all— and we’re here to help.
Our team of experienced self-directed IRA experts is here to guide you through the process, answering real RMD questions from real SDIRA investors.
Now, onto the questions:
1. Taking Rental Income as RMD
Q. Say I buy rental properties with IRA funds and collect rent. Can the rent be held as cash in my IRA so that, when I reach RMD age, I can pay it from the cash portion without distributing or selling my real estate?
A. When it comes to using rental income to cover your RMD— yes, you absolutely can take the RMD from the cash income in your IRA. There’s no problem with that. You’d submit a distribution form for the amount in cash, and that would qualify as your RMD. But, even if you don’t have the cash to take your RMD, you don’t have to sell— you can always distribute your real estate in-kind (without liquidating).
2. Is the Value of My Assets Counted When Calculating My RMD?
Q. If I buy a property with my IRA, when it comes time to take my RMD is the value of the real estate considered when calculating what I need to distribute?
A. Yes, the value of your real estate is included when determining your RMD. Your RMD is calculated by combining the total value of all of your retirement accounts as of December 31 of the previous year looking up your age on the IRS’ Uniform Lifetime Table, and then dividing your total retirement savings by your current “life expectancy factor”.
3. How to Value My Self-Directed Real Estate Assets
Q. If I distribute property to satisfy my RMD, does the basis on the property become the fair market value at the time of distribution? Or does it stay the original purchase amount?
A. When taking you RMD in-kind (without liquidating your asset) you’ll use the current appraised value, not the basis or original purchase price or value.
If distributing assets out of your IRA, you’ll always need to update the assessed fair market value. To do that you’ll submit a fair market value showing the new value for any assets you want to distribute (more details on the FMV process for real estate). You’d use an appraisal report from within the past 6 months as supporting documentation.
Relevant: Required Minimum Distributions (RMDs): The Who, What, Why, and How
4. Taking an RMD In-Kind
Q. I have some questions about my IRA holdings that have a listed value but are not currently producing income. Can I use them for my RMD? If so, at what value? And would this be considered cash income for which I need to pay taxes?
A. If you don’t have the cash in your SDIRA (or would rather not distribute it), you have other options for taking your RMD without selling your asset(s).
In your situation, it’s also worth asking if these assets are still worth their stated value. You’ll need to submit an updated fair market value to take your RMD and that could bring the value of these assets up or down, impacting the amount you need take for the year. Keep this in mind.
If these assets are still assessed at their stated value (despite their currently inactive status), you may not need to distribute the whole amount as your RMD. You can take a partial distribution of any asset, you just need to get all documents reregistered to reflect the new ownership percentages.
For example, if your asset is worth $10,000, but your RMD is only $5,000, you’d only need to distribute 50% of the asset to satisfy your requirement. You would fill out a Distribution Form noting the percent to be distributed (50%) and make sure all paperwork/deeds/titles/contracts are updated to show the new ownership (50% IRAR Trust Co. FBO Your Name & Account Number and 50% Your Name). Now you are a 50% personal owner of the asset (and don’t forget— now you personally have to pay 50% of all expenses).
Relevant: How to Take a Distribution or RMD from Your IRA LLC
5. RMD Taxes
Q. If I buy a rental property in my IRA and later want to move into it, I understand I need to do an in-kind distribution. If I sell my current home as I distribute the IRA-owned property, can I do a 60-day rollover for the in-kind distribution and invest the cash from my home sale into another IRA to avoid the taxes on the in-kind distribution?
A. Unfortunately, this isn’t something the IRS allows. You must rollover assets in the same form as they were distributed— so if you distribute cash, cash needs to come back to the IRA, and if you distribute real estate the same real estate must be returned. It doesn’t matter if the income and outgoing assets are of the same value, it’s not allowed.
If you’re looking to distribute the rental property to yourself personally but don’t want to do it all at once, there are other options (like a partial in-kind distribution over time).
REMEMBER: You’ll owe taxes on your RMD, so prepare to make this payment when paying your taxes.
If You Don’t Take Your RMD
It’s essential to take your RMD each year— at least, unless you like paying huge penalties to the IRS.
If you don’t take your required minimum distribution by the deadline, you’ll owe a 50% penalty on the entire amount you were supposed to take. That applies across all accounts (except Roth IRAs).
So, say your RMD for 2019 was $5,000— if you don’t distribute this entire amount by December 31st, you’ll be hit with a $2,500 penalty. If you distribute only part of these funds, you’ll owe the 50% penalty on the remaining amount you didn’t take. So, say you only distributed $4,000 of your required $5,000 RMD, then you’d owe $500 on the remaining $1,000 you didn’t distribute.
REMEMBER: If you missed your first RMD, you have until April 1st of the year after your turn 70½ to take it (but you’ll have to take two RMDs in one year).
In a Nutshell:
Investors often want to keep these funds in their retirement accounts, and we don’t blame them— but this is something you have to do to stay tax compliant. Getting the nuance right is important, so we suggest getting professional advice from a knowledgeable financial advisor familiar with self-directed accounts.
If you have any more questions, leave a comment below! Or if you’d rather, give us a call or email— we’d be happy to answer anything you’d like clarified.
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