April 02, 2020
Private Stock IRA Investor's Guide to RMDs
By: Christopher Orr, CISP®, SDIP
Editor's Note: This blog was originally published before the CARES Act became law. To learn how the Act affects RMDs, please read our recent blog on the topic.
One of the perks of growing your retirement nest egg using a traditional IRA is that the holdings can compound year after year on a tax-deferred basis. And one of the perks of saving for retirement with a traditional self-directed IRA is that you can grow that nest egg by investing in alternative assets, such as private stock.
These private stock IRA investments can grow tax-deferred until the year you turn 72 when required minimum distributions (RMD) must start**. RMDs are the minimum amount that must be withdrawn from your IRA every year. While investors typically take their RMDs using cash from an IRA, RMDs can be a bit trickier for self-directed IRA owners if your IRA is invested in an illiquid asset such a private company stock.
For investors who own private stock in a self-directed IRA, the following is a Q&A guide on how to handle required minimum distributions:
Q: When do I need to start taking RMDs?
A: Required minimum distribution rules do not apply to Roth IRA accounts while the holder is alive. But starting at the age of 72, investors who own a traditional, SIMPLE, or SEP IRA are required to remove a portion of assets from their IRAs each year as a distribution.
Your first required minimum distribution must be taken by April 1 of the year following the year in which you turn 72. For subsequent years, RMDs must be made by December 31.
Q: I own private stock in my self-directed IRA. How can I take an RMD?
A: The most common distribution method for taking an RMD from a traditional IRA is cash. If you can sell your private company stock, you can sell all a portion of your holdings to satisfy your required minimum distribution.
However, as is the case with many alternative investments, private company stock cannot always be easily sold and converted into cash. In this case, the typical solution for an investor who owns private stock and needs to take an RMD is to take a "distribution in-kind" from their IRA. This means you will take your RMD in the form of private company stock rather than cash.
To do this, your custodian will request that the asset sponsor re-register part of the stock in your self-directed IRA to you. Your IRA will continue to own a portion of the private stock, while you will take ownership of the percentage that has been distributed to you via the re-registration. By having your self-directed IRA custodian assign all or a portion of the private stock to you personally, you can satisfy your RMD for the year.
Q: How do I handle RMDs if I have multiple IRAs?
A: If you have more than one IRA, you must calculate the RMD for each account you own. However, you can decide to take your distribution from only one account or multiple accounts. Just be sure to take the total RMD required. RMD calculators—including this RMD calculator from the US Securities and Exchange Commission—are available that can help you determine the total amount you need to distribute.
If your self-directed IRA is invested solely in private stock, but you have enough cash or liquid stock in other IRAs to cover your yearly RMD, you can use those assets to take your full RMD. This situation would avoid the need to take an in-kind distribution from the self-directed IRA that owns private stock.
Q: When should I request my RMD?
A: While you may not need to take your first RMD until April or if you are facing a yearly RMD deadline of December 31, it's never a good idea to wait until the last minute to request an RMD. Your custodian will need time to process your distribution request and make the actual distribution to you. Be sure to build in extra time for this process, so any unanticipated delays do not push you beyond the distribution deadline.
Q: What happens if I forget to take my RMD?
A: There are penalties for forgetting to take an RMD. RMDs that are not paid out in the year in which they are due may be subject to a 50% excise tax on the amount not distributed as required. For instance, if your RMD is $10,000 and you only take out $5,000, you may be required to pay an excise tax of $2,500—half of the amount that was not distributed.
RMDs, private stock, and your traditional IRA
If you hold a traditional, SIMPLE, or SEP IRA, RMDs should be part of your overall tax planning. It's always best to work with a financial advisor or tax advisor to ensure you are meeting your minimum distribution requirements while also meeting your retirement investment goals. If you have questions about taking an RMD from your Pacific Premier Trust self-directed IRA, you can contact us at 800.962.4238.
**Under the SECURE Act, the age requirement for account owners to take their first RMD increased from 70 ½ to 72 as of January 1, 2020. This age change applies only to individuals reaching 72 after December 31, 2019. If you reached age 70½ in 2019, you must take your first RMD no later than April 1, 2020.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
Pacific Premier Trust (formerly PENSCO Trust Company) performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Pacific Premier Trust is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.
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