Managing RMDs When Your IRA Investments Are Not Liquid

The holiday season brings more than festive lights and Thanksgiving preparations. It also marks the time to take Required Minimum Distributions (RMDs). If you own a traditional IRA, SEP IRA, or SIMPLE IRA and turned 73 or older in 2023, the deadline to take your RMD is December 31, 2023. Missing this deadline results in a hefty 25% penalty on any amount not withdrawn.

Explaining RMD rules for IRAs with illiquid investments

No Exceptions for Illiquid Assets

RMDs are straightforward for liquid investments. Custodians process cash distributions or property distributions with ease. However, problems arise with illiquid assets like certain annuities, real estate, or hard-to-sell investments. These assets may be difficult or even impossible to liquidate for distribution. Even so, RMD rules apply equally to all IRAs, regardless of investment type. Illiquidity does not exempt an account from RMD obligations.

Possible Solutions for Illiquid IRAs

Aggregation

The RMD rules allow aggregation. You can combine the RMD amounts for all your IRAs and take the total distribution from a single account. For example, if one IRA holds illiquid assets, you can take the RMD for that account from another liquid IRA. Note that this method does not apply to workplace plans or Roth IRAs, as they cannot satisfy traditional IRA RMD requirements.

IRA Contributions

If eligible, you can contribute cash to your IRA to help address liquidity issues. The SECURE Act now allows IRA contributions at any age, provided you have earned income. However, annual contribution limits apply, which may not suffice to cover the full RMD amount. While this can help, it is not a comprehensive solution.

Plan Ahead to Avoid Problems

Illiquid investments create ongoing challenges because RMDs must be taken annually. Failure to meet these obligations can lead to penalties, even if a waiver for the 25% penalty is later granted after the missed RMD is corrected. To avoid such problems, plan in advance.

As you approach your required beginning date, ensure that your IRAs contain enough liquid assets to satisfy annual RMDs. Proactive planning can save you significant financial and logistical difficulties in the future.

Frequently Asked Questions

What happens if I miss the RMD deadline?: Missing the deadline triggers a 25% penalty on the RMD amount not taken. You can request a waiver for the penalty after taking the missed distribution.
Can I satisfy an RMD for one IRA using another IRA?: Yes, you can use the aggregation rule to take the total RMD for all your IRAs from one liquid IRA. This does not apply to workplace plans or Roth IRAs.
Does the IRS offer exceptions for illiquid IRA investments?: No, the IRS does not exempt illiquid assets from RMD requirements. These rules apply uniformly to all traditional IRAs.
How can IRA contributions help with RMDs?: If you have earned income, you can contribute to your IRA to inject cash. However, contribution limits apply, so this may not fully cover the RMD.
Can workplace plans or Roth IRAs satisfy RMDs for traditional IRAs?: No, RMDs for traditional IRAs cannot be satisfied using distributions from workplace plans or Roth IRAs.
What steps can I take to prepare for RMDs on illiquid investments?: Keep enough liquid assets in your IRAs as you approach the required beginning date. Regularly review your investment strategy to ensure compliance with RMD rules.