IRA, RMD - account valuation

[t.haley]

Client has IRA. Only asset is investment in limited partnership. Owner turned 70 1/2 in 2011. Account balance reported on 12/31 (by K-1) $273,000. However, we have now learned that limited partnership is out of business; asset basically worthless. Custodian calculated RMD (to be distributed by 4/15/2012) based on 12/31 value from K-1. Obviously, there are no funds in the IRA to fund the RMD. Does 1.410(a)(9)-5, Q&A-1 solve this situation ("However, the required minimum distribution amount will never exceed the entire account balance on the date of the distribution")? Are there any reporting requirements we have to meet to verify the account balance on the date of distribution? Any guidance is greatly appreciated!

[t.haley]

Sorry - included wrong dates in previous post.

Owner turned 70 1/2 in 2012. RMD due 4/15/2013.

[ETA Consulting LLC]

Well, if you are saying that you've fully distributed the account, then there is no issue. Details are important. How did the LP value go to zero. Did the LP continue to pay out huge sums to money to the investors?

Ultimately, the IRA will report the (I believe it's on a 5498) account value each year to the IRS. An obvious question is whether the value of $273K was correct to begin with. Something may go from $273 to zero much quicker than from $273K to zero. If you're saying that the entire amount lost all value, then it is what it is. I would imagine the Form 5498 will reflect zero at the end of the current year.

Good Luck!

[t.haley]

Well, if you are saying that you've fully distributed the account, then there is no issue. Details are important. How did the LP value go to zero. Did the LP continue to pay out huge sums to money to the investors?

Ultimately, the IRA will report the (I believe it's on a 5498) account value each year to the IRS. An obvious question is whether the value of $273K was correct to begin with. Something may go from $273 to zero much quicker than from $273K to zero. If you're saying that the entire amount lost all value, then it is what it is. I would imagine the Form 5498 will reflect zero at the end of the current year.

Good Luck!

The client has not received any distributions from the IRA. The information we have from the client is that the investment is worthless at this point. The partnership (a restricted hedge fund) has gone out of business. Calls and emails to the offices of the partnership are not answered. Evidently there are some issues with the owners/insiders (alleged criminal activity, license revoked, etc.). The client is trying to avoid including the reported K-1 value from 2011 in the calculation of his RMD (he has a couple other IRAs). Will reporting a zero value on the Form 5498 be enough to avoid including the 2011 value in the RMD calculation?

[jpod]

You keep changing the facts. If he has other IRAs with other assets, the "date of distribution" exception won't apply here, except to the extent that 100% of the other IRA assets isn't enough to satisfy his RMD.

You must use the $273K value in calculating the aggregage MRD from all three IRAs, unless the client has good reason to believe that the $273K value was bogus, in which case he should explore that further so he can have some back-up support for using a lower value.

[Bird]

K-1 does not generally provide a fair market value, although with a hedge fund, if the underlying investments are readily valued, then (I think) the capital account will essentially devolve to FMV.

But it is highly unlikely, IMO, that the FMV went from $273K on 12/31/11 to $0 now. I'd challenge/question/review the $273K. But as jpod notes, if he has other IRAs, he'd have to take money from them to the extent possible to satisfy the RMD.

A $0 value on a 2012 5498 does you no good, IMO.

Curious as to who is the custodian - a local trust department, or one of those firms that specializes in self-directed IRAs?

[t.haley]

Thank you for your replies. It appears there is not much we can do at this point as to the 12/31/11 account balance based on the K-1. The custodian is not budging on that. Client is hoping that Form 5498 for 2012 may give him basis for arguing that balance on date of RMD distribution in April is less than calculated RMD. The way I read the regs, an individual with multiple IRAs MUST calculate the RMD for each one separately but MAY aggregate the RMD totals together and pay out of one or more of the IRAs. That, together with the general rule from the 401 regs that an RMD can never exceed the account balance on the date of distribution seems to me to mean the individual RMD calculated for each IRA is limited to the account balance of that IRA, not the aggregate total of all IRAs. Stated another way, if the 408 regs say the RMD for each IRA must be calculated separately and the 401 regs say that the RMD as calculated can never exceed the account balance of that IRA on the date of distribution, then in our case, if the RMD calculated based on the 12/31/11 K-1 value is more than the account balance of that individual IRA on the date of distribution in 2013, we are only required to distribute the account balance of the IRA as the RMD for that IRA (and if the balance of that IRA is zero, there is no RMD due for that IRA). Thoughts?

[jpod]

t. haley: Your interpretation seems to good to be true, but I admit to never having researched it and I was going based on memory. Maybe you're right; good luck.

[Bird]

Not sure but I think you might be right; sounds reasonable.

Still wondering about the custodian.

[K2retire]

Could the RMD be satisfied by distributing 100% of the partnership interest to him?

[Guest Rajeev]

There is a lot of different information provided by t.haley on this.... lets try and break it up:

(1) A K-1 only depicts what is principal investment balance and thereby potentially only a "net asset value" (reflecting Bird's comment -- with a caveat: see below)

(2) A "fair market value" is defined as "what a willing buyer and seller would take to complete a transaction at a certain price"

(3) For the purposes of an RMD, a fair market value of the IRA account (including all of its assets) has to be established.

(4) For the purposed of the Limited Partnership, simply stating by either yourself or the account holder that the LP is dead due to what-ever reasons, is not establishment of fair market value. One has to work with a professional who can help determine a fair market value of the LP at hand by looking through all the documentation, and the current status of the LP. Fair Market Value determination can also be done post-mortem (i.e. based on a certain point in time - albeit more expensive). The professional (generally a CPA or a business/securities appraiser qualified in the valuation field) will generally establish the fair market value and provide such in writing (typical costs depending on the firm and the complexity of the asset and availability of the data start at $5000).

(5) Once the documented Fair Market Value has been established that can be provided to the custodian who will update the value of the LP (and thus the account) and thereby issue the updated 5498, which can then be used to determine the RMD for the client

(6) RMD may be taken in kind (although it depends on the custodian) and the re-registration of the asset must also be completed prior to required RMD. Not completing the re-registration is deemed as an incomplete RMD.

Hope this helps...

Rajeev