By Sarah Brenner, JD
Director of Retirement Education
Tis the season. Yes, it is the holiday season, and it is also the season to take RMDs. RMDs are back for 2021 after being waived by the CARES Act for 2020. With the return of RMDs come questions. One question we have been getting a lot this year involves RMDs when IRA investments are illiquid.
When it comes to RMDs from IRAs, the rules are pretty straight forward. If you have a traditional IRA (or a SEP or SIMPLE IRA) and you are age 72 or older during 2021, you must take an RMD. If this your first RMD calendar year you can delay your 2021 RMD until April, 1, 2022. Everyone else must get their 2021 RMD out of their IRA by December 31, 2021. The clock is ticking, and time is almost up. Many IRA custodians, in order to avoid last minute mistakes and allow enough time for processing, have deadlines even sooner. Missing the RMD deadline is serious business because there is a 50% penalty on any RMD amount that is not taken.
For most IRA investments, once the RMD calculation is done, processing the distribution is no big deal. A cash distribution or even a distribution of property can easily be done. But for some IRA investments it is not so simple. Some IRA assets are much harder to liquidate. Some annuity products, some hard to sell investments, and real estate may be difficult or almost impossible to liquidate. Distributing the RMD in shares of the investment may also be complicated or not possible. Despite these issues, there is no exception for illiquid assets to the RMD requirements. These requirements apply to all IRA, regardless of the type of investment.
What if your IRA is entirely illiquid? There are some possible solutions. One of them is aggregation. The RMD rules allow you to aggregate your RMDs from your IRAs and take the total amount from one account. If you have one IRA that is illiquid you could simply take the RMD for that account from another IRA. Remember, there are limits here. You cannot satisfy your RMD for your IRA from a workplace plan or a Roth IRA. Another possibility is to make a tax year IRA contribution if you are eligible to inject some cash into an IRA. The SECURE Act makes this possible by allowing IRA contributions at any age, but you would need to have earned income and you would be limited to $7,000. That may not be enough to satisfy the RMD.
Your options are limited, and the problem will not go away. Each year an RMD must be taken. While it is possible to get an IRS waiver of the 50% penalty, that can only be done after the missed RMD is taken. These issues are why it is a good idea, if your IRA is invested in alternative investments, to plan ahead. As you approach your required beginning date, be sure to keep enough liquid assets in your IRAs to satisfy your RMDs.