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Participating in a traditional self-directed IRA can provide you with diverse investing options and tax benefits. If you have had the opportunity to establish one of these self-directed, tax-advantaged savings accounts and make contributions, you will benefit from understanding the laws surrounding taking distributions from a self-directed IRA. With the required minimum distributions deadline coming up on Decemeber 31, it would be a smart idea to brush up on some must-know rules and tips for an easier distribution process.
Reap the pre-tax benefits
Traditional self-directed IRAs provide account owners with the benefit of making contributions from pre-tax income. This benefit comes at the cost of having to pay taxes when distributions are taken. This compares to Roth IRAs, which involve post-tax contributions and possible tax-free distributions.
Avoid penalties before age 59 ½
If you have not attained the age of 59 ½ when taking money from your self-directed IRA, you will end up facing a 10 percent penalty along with paying income taxes on the distributions taken.
If you are considering taking distributions from your self-directed IRA, you must also keep in mind that taking funds out of one of these self-directed, tax-advantaged savings accounts comes at the cost of losing the tax-deferred accumulation of the growth on the investments. Taking distributions from your self-directed IRA will mean the amount distributed will be taxable as well as the earnings on investments may now be subject to taxation.
Know which exceptions to utilize
Generally, you need to reach 59.5 years of age before taking distributions in order to avoid paying an early withdrawal penalty of 10 percent. However, there are various exceptions you can utilize that will allow you to take funds out of your self-directed IRA without paying the penalty.
The exceptions apply when you:
- Take funds out for qualified education expenses (higher level)
- Become permanently disabled
- Withdraw funds for a qualified first home purchase
- Medical insurance premium payments while unemployed
- Pass away and have your account balance paid to your beneficiary without reaching the aforementioned age
- Amounts paid toward medical expenses that exceed 10 percent of your adjusted gross income
- Substantial equal periodic distributions
- Qualified reservist distributions
Withdraw distributions to avoid penalties
Once you reach the age of 70.5, IRS regulations specify that you generally must take required minimum distributions (RMDs) every year. If you do not withdraw the specified amounts, you could face penalties as high as 50 percent of the required amount you failed to take out. In addition, it is important to know that taking more than your RMD will not reduce the amount of the following year’s RMD.
Did you know RMDs can be more convenient and less costly with The Entrust Group myDirection Distribution Card? Learn more here.
If you want to know more about the various legal caveats that surround taking distributions from self-directed IRAs, please contact us.