If your self-directed IRA owns a rental property, a private note, or a stake in an LLC, your required minimum distribution (RMD) can feel like a puzzle. The IRS expects a distribution every year, but your retirement dollars aren’t sitting in a money market fund waiting to be withdrawn. They’re working in assets you chose because you understand them.
The good news is that you don’t always have to sell something to satisfy your RMD. In many cases, you can take your distribution “in-kind,” which means the asset itself, or a portion of it, moves out of your IRA and into your name. Here’s how that works, how the asset is valued, and what it means at tax time.
What Does “In-Kind” Mean?
An in-kind distribution is a distribution of property instead of cash. Rather than your IRA selling an asset and sending you the proceeds, the IRA transfers ownership of the asset (or a slice of it) directly to you. The fair market value of what you receive counts toward your RMD, just like a cash withdrawal would.
This can be especially helpful when your IRA is mostly illiquid, when you’d rather not sell an asset in a hurry or in a soft market, or when you’d simply like to own the asset personally going forward.
What Can Be Distributed In-Kind?
- Real estate. Your IRA can deed the entire property to you, or it can deed out a percentage interest. For example, if your RMD works out to roughly 5% of the property’s value, the IRA could transfer an undivided 5% interest to you and keep the remaining 95%. Some account holders repeat this each year.
- Promissory notes. If your IRA holds a note, it can assign the entire note to you or a partial interest in it. Once assigned, the payments tied to your share come to you personally instead of to your IRA.
- LLC interests. If your IRA owns membership units in an LLC, it can distribute some or all of those units to you, as long as the LLC’s operating agreement allows the transfer.
How Is the Asset Valued?
Two different numbers matter here, and they’re easy to mix up.
First, your RMD amount is calculated using your account’s fair market value as of December 31 of the prior year, divided by your life expectancy factor from the IRS tables. That’s one reason accurate year-end valuations are so important for self-directed accounts.
Second, the asset you distribute is valued on the date it leaves your IRA. If your RMD is $18,000, you’ll need to distribute property worth at least $18,000 on the day of the transfer.
Supporting that value matters. For real estate, that usually means a current appraisal or other professional valuation. A note’s value depends on its interest rate, payment history, collateral, and remaining term, so it may be worth more or less than the unpaid balance. An LLC interest depends on what the LLC owns and may call for a formal valuation. Well-documented numbers protect you if questions ever come up later.
A helpful tip: build in a small cushion. If the value comes in slightly lower than expected, a small cash distribution can cover the difference.
How Is It Taxed?
For a traditional, SEP, or SIMPLE IRA, an in-kind RMD is taxed the same way as a cash RMD. The fair market value of the asset is included in your taxable income as ordinary income for that year, and you’ll receive Form 1099-R reporting the distribution.
A few details worth knowing:
- Your new basis. The value reported on your 1099-R generally becomes your cost basis in the asset. If you sell it later, your gain or loss is measured from that value.
- Withholding. Federal tax withholding applies to IRA distributions by default unless you elect out. Since a deed or a note can’t be split to cover withholding, most people either elect out and plan for the tax separately, or take a small cash distribution alongside the property. State rules vary.
- No do-overs. RMDs can’t be rolled back into an IRA, and IRA contributions must be made in cash. Once the property is distributed, it stays out.
- Extra value doesn’t carry forward. If the property is worth more than your RMD, the full value is taxable this year, and the excess doesn’t count toward next year’s RMD.
Things to Think Through Before You Decide
- Shared ownership. When your IRA distributes only a percentage of a property, you and your IRA become co-owners. Every expense and every dollar of income needs to be split according to those ownership percentages, and you still can’t use the property personally. Keeping IRA and personal funds strictly separate helps you avoid a prohibited transaction.
- Costs. Appraisal fees, recording fees, and any state or county transfer taxes can add up, so factor them in.
- Timing. Valuations, paperwork, and recording all take time. Starting early in the year, or at least well before the holiday rush, gives you room to breathe.
- Your other accounts. If you have more than one traditional IRA, you can generally take your total IRA RMD from any one of them or a combination. Sometimes the simplest move is to take cash from another IRA and leave your real estate untouched. Keep in mind that 401(k) plans don’t aggregate this way, and whether an owner-only 401(k) allows in-kind distributions depends on the plan document. Roth IRAs have no RMDs for the original owner.
How MidAtlantic IRA Can Help
When you’re ready to explore an in-kind RMD, reach out to our team. We’ll walk you through the paperwork, the valuation documentation we’ll need, and how the asset will be retitled or assigned. We then report the distribution to you and the IRS on Form 1099-R.
Every situation is different, so we always recommend talking with your CPA or tax advisor before you finalize anything. MidAtlantic IRA doesn’t provide tax, legal, or investment advice, but we’re always happy to help you understand how the process works.
Have questions about your RMD? Schedule a call with our team and we’ll talk it through together.