Whether you’ve just entered retirement or are planning your long-term goals, understanding how to take distributions from your self-directed IRA (SDIRA) is crucial for a smooth transition into your golden years.

You’ve spent years building this nest egg, and while you may be eager to reap the rewards, you might also want to let your assets grow a little longer.

The process of withdrawing from an SDIRA can be tricky and fraught with potential penalties if done incorrectly.

To help you navigate this critical phase, we’ve compiled the top nine most frequently asked questions regarding SDIRA distributions.

1. When Can You Start Taking Distributions?

You can start penalty-free distributions at age 59½. For Roth IRAs, the account also needs to have been open for at least five years.

If you withdraw early, a 10% penalty applies, and with a traditional IRA, you’ll also face taxes on the deferred income.

Traditional IRAs and Roth IRAs function differently when it comes to taxation and early withdrawal penalties. Be mindful of your specific account type before making a withdrawal decision.

2. Are There Exceptions to Early Withdrawal Penalties?

Yes, specific circumstances allow for early, penalty-free withdrawals from either a traditional or Roth SDIRA, including:

• Disability.
• Medical expenses exceeding 10% of your adjusted gross income.
• Qualified educational expenses.
• Converting a traditional IRA to a Roth IRA.
• First-time home purchases.
• Passing of the account holder (beneficiary can withdraw without penalties).

Knowing these exceptions can save you from unnecessary penalties. Plan wisely by consulting with a professional.

3. When I Reach Retirement Age, Am I Required To Take Distributions?

This depends on whether you have a traditional or Roth IRA. With a traditional SDIRA, Required Minimum Distributions (RMDs) must start at age 73 (updated for 2024). Roth IRAs, on the other hand, do not require RMDs during your lifetime, allowing your funds to grow tax-free indefinitely.

This distinction between traditional and Roth IRAs is crucial for tax planning. Roth IRAs give you more flexibility, particularly if you aim for long-term wealth preservation..

4. Are There Any Advantages To Having A Roth IRA?

Yes! The biggest advantage is that Roth IRA owners do not need to take required minimum distributions. Additionally, Roth IRA owners aren’t penalized for taking distributions early. The taxes have already been taken out. Roth earnings grow, tax-deferred and are distributed tax-free once you reach retirement.

5. What Is RMD?

RMD stands for required minimum distributions. For traditional IRA owners, this is a step that makes taking distributions from their retirement funds mandatory. After you turn 73, you must take withdrawals if you have a traditional IRA. There are steep penalties for not taking the correct amount: up to 50 percent excise tax.

Failing to take the correct RMD could lead to hefty tax penalties, so carefully plan and track your withdrawals.

6. How Do I Take Distributions From My IRA?

When you reach retirement age, you can’t just take your distributions. You need to make a request to your IRA custodian. After you put in the request, the custodian issues the funds, completes the necessary paperwork, and processes the request with the IRS. Also, if you wish, the custodian will withhold state and federal taxes from the distributions.

Your custodian plays a vital role in ensuring the IRS paperwork is handled correctly. Choose a custodian you trust.

7. Does It Cost Anything To Take Distributions?

Yes, IRA owners must pay a fee to their custodian after every withdrawal. Fees range depending on the custodian and how the funds are transferred. It’s important to carefully plan your withdrawals, as taking too many can be costly.

Planning fewer, larger withdrawals can help minimize fees and prevent unnecessary expenses.

8. Is There A Way To Calculate RMD?

There are two different ways you can calculate RMD, and both are dependent on your beneficiary. If your spouse is your beneficiary, and they are more than ten years younger than you, that will affect how RMD is calculated. Remember with, either way, it will be the minimum required; you can always take more.

Calculating your RMD correctly ensures you avoid penalties and keep your retirement funds working efficiently.

9. What Are The Two Ways To Calculate RMD?

There are essentially two tables you can follow: The Joint Life and Last Survivor Table and the Uniform Lifetime Table. When the beneficiary of the self-directed IRA is a spouse more than ten years younger than the owner, they can follow the Joint Life and Last Survivor Table. The funds in your IRA can stretch further over a longer period of time.

If your beneficiary does not fit this requirement, your RMD will follow the Uniform Lifetime Table. Both these tables calculate the minimum amount you need to take to avoid penalties. It is possible to take more or hit your RMD by taking from numerous IRAs. However, you must take the right amount.

Understanding which table to use can help maximize the longevity of your IRA assets.

Preparing For Retirement

As you prepare for retirement, it’s crucial to know how and when to take distributions to avoid penalties and keep your retirement plan on track.

By performing due diligence and planning ahead, you can continue to enjoy the benefits of your self-directed IRA without unnecessary stress.

FAQ

What is a distribution from a Self-Directed IRA?

A distribution from a Self-Directed IRA refers to withdrawing funds or assets from your IRA account. Distributions can be taken as a lump sum, periodic payments, or in-kind (where you take physical possession of assets like real estate or precious metals).

Are there any tax implications when taking a distribution from a Self-Directed IRA?

Yes, distributions from a Self-Directed IRA are generally subject to income tax if the account is a Traditional IRA. The amount withdrawn is added to your taxable income for the year. For Roth IRAs, qualified distributions are tax-free, provided certain conditions are met. Additionally, if you take a distribution before age 59½, you may face a 10% early withdrawal penalty unless you qualify for an exception.

How do I request a distribution from my Self-Directed IRA?

To request a distribution, you need to submit a distribution request form to your IRA custodian or trustee. The form will ask for details about the amount and type of distribution you want. If you’re taking an in-kind distribution (such as real estate), additional steps may be required to transfer the asset.

Be sure to consult a trusted Horizon Trust financial advisor if you are concerned about RMD or if you are considering a Roth IRA. Prepare for your retirement now so you can enjoy your nest egg in the future.