A self-directed IRA is unique in having a different transaction model, and opening up the possibility to invest in to a diverse range of assets such as real estate, private placements, and more.
When it comes to the basic concepts of account administration, however, a self-directed IRA is no different from a conventional IRA. This applies to the concept of taking distributions from your account.
Distributions from a self-directed IRA are subject to all the same timelines and rules as any other IRA. That being said, there are some differences in the actual process of taking distributions.
Here are 7 frequently asked questions about IRA distributions.
1. When Can I Start Taking Distributions from My IRA?
You may make a distribution from your self-directed IRA once you reach 59½ years old. An early withdrawal penalty may apply if you take a distribution before you reach age 59½—with some exceptions.
A Traditional IRA distribution is taxed as ordinary income for the tax year of the distribution.
With a Roth IRA, qualified distributions are tax free.
A Roth distribution is qualified if it was made after a 5-year period, beginning with the first taxable year a contribution into the account was made, and if the distribution was either:
- made after you were 59 ½ years old, or
- made because of disability, or
- made to a beneficiary because of death or,
- one that meets the requirements under first home exception.
If your Roth distribution isn’t qualified, it may be subject to a 10% early withdrawal penalty, along with ordinary income tax on growth above the originally contributed or converted basis
2. Am I Required to Take Distributions From My IRA?
Yes. You are required to take distributions from your tax-deferred IRA if you’re over age 70 ½.
You’re also required to take distributions from a non-spousal inherited IRA. Your options and the rules regarding your required distributions are dependent on a few different factors, like the account type of your non-spousal inherited IRA. Learn more about taking a distribution from your inherited IRA»
Failure to take Required Minimum Distributions (RMD’s) can result in a penalty of 50% of the amount you were supposed to distribute.
There is no requirement to take distributions from your own Roth IRA. An inherited Roth IRA is subject to the same RMD requirements as a tax-deferred account.
3. How Do I Take Distributions From My IRA?
To maintain proper IRS reporting, you don’t get to write yourself a check from the IRA-owned LLC. Funds must be transferred from the LLC back to the IRA, which is essentially like “selling shares of a fund”.
You then request the distribution from the IRA custodian. They’ll issue funds to you, complete the necessary reporting to the IRS, and withhold state and federal taxes if you request for them to do so.
4. How Long Does it Take to See my Distribution?
Expect 3-5 business days for processing by the custodian. With allowance for mailing funds from the LLC to the IRA and from the IRA to you, the total process can take 2-3 weeks.
The process can be expedited by using wires on one or both fund transfers, but this will increase the cost.
5. Is There a Cost for Taking a Distribution?
Yes, expect total fees in the range of $45 to $75 depending on your custodian and whether checks or wires are used to transmit funds.
The custodian is documenting the sale of ownership interest in the LLC, as well as processing the distribution to you.
It is generally better to take just one or two distributions per year—monthly distributions could get expensive.
6. How Do I Manage Required Minimum Distributions?
Your IRA custodian will calculate the amount you are required to distribute from your account and provide you with this value. It is important to verify the accuracy of the custodian’s calculations, which may be best accomplished by having your CPA review the account.
The RMD amount for each IRA you have will be calculated independently, based on the account value and the appropriate life-expectancy table provided by the IRS. Which table is used and what age factor will apply may vary depending on whether you are dealing with your own account or one that has been inherited.
If you have more than one IRA you can be flexible in how you source your distributions. You don’t have to take the required amount from each individual account separately. So long as you distribute the total amount required across all IRA accounts, you have met your obligation. This allows you to choose which assets to liquidate and which to keep invested, and thereby best maintain the performance of your overall portfolio.
Additionally, strategies like consolidating your IRA accounts and automating your RMDs can also help take some of the confusion out of the distribution process, which brings us to our final FAQ:
7. Can I Automate the Distribution Process?
Automating your distribution process may be possible, depending on your LLC banking relationship.
You would need to automate the liquidation of cash from the LLC back to the IRA. This will require submission of a deposit form, so at least this one manual step will be required.
You can schedule periodic distributions from the IRA with your custodian.
Speak to a trusted advisor if you have any questions or concerns about your IRA distribution strategy. You may also want to discuss how you can manage your required minimum distributions in a way that is most beneficial to your specific financial goals.