Managing RMDs When Your IRA Investments Are Not Liquid

What to Know About RMDs and Illiquid IRAs

When you turn 73 or older in 2023 and hold a traditional, SEP, or SIMPLE IRA, you face a clear deadline: take your Required Minimum Distribution (RMD) by December 31, 2023. Miss that deadline and the IRS enforces a stiff 25% penalty on any RMD amount left undrawn.

RMD rules treat all IRA assets—liquid or not—the same. That means investments like annuities, real estate, or partnership interests don't receive any leniency. You must withdraw the required amount, regardless of how hard those assets are to convert into cash.

Two Strategies to Manage RMDs When Assets Are Not Liquid

One effective approach is to take advantage of the IRS’s aggregation rule. This rule allows you to total the RMDs required across all your traditional IRAs and then withdraw that total from just one IRA that holds liquid assets. This method only applies to traditional IRAs, including SEP and SIMPLE IRAs. It does not apply to employer-sponsored plans like 401(k)s or to Roth IRAs.

Another strategy involves contributing cash to your IRA. The SECURE Act permits contributions at any age, provided you have earned income. If you face liquidity challenges, you can contribute cash to your IRA to help meet the RMD. While annual limits still apply and may not fully satisfy the RMD, the additional liquidity can help reduce the financial strain.

Planning Ahead to Avoid RMD Issues

Effective planning starts well before you reach the required beginning date for RMDs. Begin by assessing the composition of your IRA accounts. Make sure they include a sufficient portion of liquid assets such as cash or publicly traded securities. Convert illiquid holdings gradually over time if possible.

Next, calculate your annual RMD using the IRS Uniform Lifetime Table or other applicable tables depending on your situation. These calculations change based on your account balance and life expectancy, so reviewing them annually is critical.

Once you have a reliable estimate of your required distribution, build your investment strategy around making that amount accessible. This may involve reallocating funds or coordinating across different IRAs. Avoid relying solely on last-minute liquidity events that could fall through.

By acting early, you reduce the chance of incurring penalties or needing to request a waiver from the IRS. Preparing in advance also improves cash flow and limits the need for disruptive asset sales.

Frequently Asked Questions

What penalty applies if the RMD deadline is missed?
The IRS enforces a 25 percent penalty on the amount that was not withdrawn by the deadline. You may request a waiver after completing the missed distribution, but the penalty remains unless the IRS approves the waiver.

Can one IRA cover the RMD requirement for another?
Yes, if both accounts are traditional IRAs. The aggregation rule allows you to combine the total RMD amount from multiple IRAs and withdraw it from a single account with sufficient liquidity. This flexibility does not extend to Roth IRAs or employer-sponsored plans.

Are there exceptions to the RMD requirement for illiquid assets?
No. All IRA holdings are subject to RMD rules, regardless of whether the assets are easy or difficult to liquidate. The IRS expects the required amount to be withdrawn on time.

How do contributions help manage RMDs?
If you have earned income, you may contribute cash to your IRA. This increases liquidity in your account, which can assist with taking the RMD. Keep in mind that the contribution limit may not be enough to meet the full RMD, but it can help bridge part of the gap.

Can distributions from other retirement accounts cover traditional IRA RMDs?
No. RMDs for traditional IRAs must come from traditional IRAs. Roth IRAs and workplace retirement plans cannot fulfill this requirement.

What actions help ensure RMD compliance when dealing with illiquid investments?
Review your IRA holdings periodically and rebalance as needed to maintain liquid assets. Schedule your RMD withdrawal early in the year to avoid last-minute complications. Also, work with a financial advisor to ensure your investment and distribution strategies align.