minimum distribution

[Tom Poje]

someone asked me this and I don't deal with IRAs, but anyway:

"I have an IRA that consists of an auction rate bond that I cannot sell. The bond does not pay enough interest to to meet the min distribution I am required to withdraw. What should I do?"

I guess, in other words, if you have all assets tied up in non liquid assets, how do you pay a min. distribution.

[Belgarath]

Oops. didn't read it carefully enough to notice that it can't be sold. I have no opinion!

[JanetM]

Any other retirement accounts they could draw from?

[pmacduff]

IMHO - since you can combine minimum required distributions and take them from one IRA (unlike qualified plans) - I would suggest the client take more out of another IRA acccount to cover the total minimum. If he has no other IRA accounts then I think he's got bigger issues with such a "nonliquid" asset !

Janet beat me to it!!!!

[Guest rjcorbin]

Any other retirement accounts they could draw from?

I have used all the liquid assests in my IRA (this is the only IRA, I have no other retirements accounts) and now I am down to non liquid assets and cannot pay min distribution.

Thanks

Rjcorbin

[jevd]

Will the transfer agent/sponsor allow for a partial in-kind distribution to the client of the amount required tosatisfy the RMD? (Joint ownership between the IRA and the client as an individual)

[masteff]

When does the account holder turn 70 1/2? Is the account holder eligible to convert to a Roth IRA?

[jevd]

When does the account holder turn 70 1/2? Is the account holder eligible to convert to a Roth IRA?

Account holder is 70 1/2. I like your idea though. It still would require the RMD for the current year to be satisfied and it would mean paying the taxes on the entire account. It would however preserve tax deferred and possibly tax free income.

[masteff]

I've been reading up on the mess in the auction rate bond market. I'm now guessing that the bond can't be sold because that market has become illiquid, not because of other restrictions on the bond itself. My opinion is the holder has roughly six months remaining this year to find someone who will buy part or all of the bond. This may mean giving a discount on the bond.

Have to weigh the loss from selling the bond at a discount against the excise tax on the incomplete MRD. The problem is that annual MRDs will begin to snowball as the bond's interest income becomes less and less able to service the growing accumulated MRDs.

It's going to take a lot of phone calls to a lot of brokers and possibly a lot of online investigation to find a broker/dealer who might happen to know an investor who'd be willing to buy the bond. I'd ask around for people who specialize in placing illiquid assets. Might go on the more popular forums like Motley Fool and try to get leads from there as well. Hmm, and the biggest brokerage firms are the most likely to have clients in other cities that might be willing to buy, so starting w/ the big houses might get you the fastest result.

Oh, and if the bond can be sold in partial units, you only have to offer the biggest discount on the piece you need to cover this year's MRD. You can then shop the rest of the units around for a better deal (at least until you need to cover next year's MRD).

[John G]

What exactly is considered non-liquid in this IRA? There are not too many assets that can't be sold in 6 months.

[jpod]

Are we talking huge dollars here? Can the IRA owner afford to (a) pay for an independent valuation, (b) pay FMV for the bond (or to borrow money to pay for the bond), and © hire legal counsel to apply to the DOL for a PT exemption? If so, he should consider trying to get a PT exemption to buy the bond from the IRA for cash, then distribute MRDs in cash thereafter.

Alternatively, perhaps the bond can be dropped down into an LLC that is owned by the IRA, then the IRA distributes membership interests to the IRA owner each year having a value equal to that year's MRD (although I'd have to think a bit more about whether any one or more of those transactions might be a PT for which an individual exemption would be required). He would need to transfer the bond to an IRA custodian that accomodates sophisticated IRA investments.

If the dollars are not huge, none of the above seems to be worthwhile. Just take the entire bond out of the IRA in kind, pay tax now (presumably on a depressed value), and forget about it.