Real estate investments can help your retirement portfolio grow throughout your investing lifetime, while also playing an important role in portfolio diversification. Holding real estate in tax-advantaged accounts like IRAs or 401(k)s means the owner is subject to required minimum distributions (RMDs), which, under current regulations, apply once the taxpayer reaches the age of 72.
Cash-flowing investments like rental properties can make withdrawals easier, but what about assets that don’t generate consistent cash or don’t have sufficient cash to cover the full amount? Can mandatory distributions be satisfied without having to sell?
The answer is “yes.” Even better, it may be easier than you think.
Need to take a distribution? Get started by logging into the Client Portal.
Partial In-Kind Distributions
Perhaps contrary to what you might otherwise guess, you’re under no obligation to liquidate your retirement holdings prior to distribution. Instead, owners can take a partial “in-kind” distribution. These partial in-kind distributions can be particularly useful when your account holds tangible property.
It may be equally useful to know that you wouldn’t have to distribute a real estate asset in full. For example, if your IRA owns 100% of a condominium valued at $200,000 and your RMD for the tax year is equal to $2,000, you could distribute 1% of the condo to yourself.
Importantly, while the IRS wants you to take your RMD—because you must realize the amount as ordinary income and include it on your tax return—it doesn’t care what form the distribution takes. It is of no concern to the government if you receive $2,000 in cash or an ownership slice valued at $2,000; your tax form will record the amount along with all the other income and deductions to determine the tax you owe.
Partnering or Clubbing with Your Account
You may be wondering, “Doesn’t the IRS have rules against self-dealing? Wouldn’t all of this fall under that category?”
The answer in this case is “no.” There are no rules that prevent you from working side by side with your account.
Prohibited self-dealing would mean providing direct benefit, financial or otherwise, to an account-held asset (e.g., using non-retirement money to cover repairs on a retirement plan-owned property). You also cannot derive direct, personal benefit from an account-held asset (e.g., personally retaining rental income from an IRA-owned rental property).
However, when a property has multiple owners, such as an investment “clubbing” arrangement, each owner can receive income and cover expenses in accordance with their ownership percentages. Your account is a unique “investor” in the eyes of the IRS. You can be one investor on a property while your IRA can be another, or you could have separate tax filers who have their own combination of tax-advantaged and non-tax-advantaged monies contributed to the investment.
Regardless of how the investment is funded, you can distribute a portion of your retirement property to yourself as long as you maintain separation. From our initial example, an in-kind distribution of 1% of a property would mean 1% of the property’s income would go into your pocket and your account would keep the remaining 99%.
Remember the Rules
Another important rule to note is that you may not personally use an account-held property. This means you couldn’t spend a weekend at your account-held beach house even if you personally own a portion of it outside of your tax-advantaged account. Just because you split a piece of real estate 50/50 with your self-directed IRA, you would not be allowed to use half of the house. This restriction is lifted once you take 100% personal ownership.
Reach Out with Questions
The fact you can take your RMDs without having to liquidate or distribute an entire property provides a measure of comfort. In addition to in-kind distributions, you can also distribute the amount from another IRA account to cover the amount that would otherwise be due from this account, as the IRS considers the total account balance in determining the amount of RMD due in a given year and does not mandate a pro-rata distribution from each separate account. With this in mind, while withdrawing a fraction of a physical asset may be appropriate, it is not your only option to satisfy the RMD.
Feel free to give us a call at 877-742-1270 or send us a message through the Client Portal if you have questions or concerns.