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7 Essential Tips for Taking Distributions From Your Self-Directed IRA

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If you’re approaching the age of 59, you will soon be eligible to begin taking distributions from your self-directed IRA without being subject to an early distribution penalty. And if you’re about to turn 70½, it won’t be long until you must take Required Minimum Distributions from your Traditional IRA. As with many things that involve the IRS, there are nuances and special conditions that affect what you should do and how much you should withdraw.

 

Entrust wants to help you avoid costly penalties for taking distributions early or forgetting to take distributions when you’re required to do so.

1) Age

Although you can take distributions from your IRA at any time, generally, you need to be 59½ years old before taking distributions in order to avoid paying an early withdrawal penalty of 10 percent. There are various exceptions that will allow you to take funds out of your IRA without paying the penalty:

  • If you become disabled
  • You withdraw funds for qualified education expenses
  • You withdraw funds for a qualified first home purchase
  • In the event of your death, your account balance is paid to your beneficiary
  • Amounts paid toward medical expenses that exceed 10 percent of your adjusted gross income
  • Medical insurance premiums paid while unemployed
  • Qualified reservist distributions
  • Traditional IRA to Roth Conversion
  • If your distribution is part of a series of substantial equal periodic distributions
    • Substantial equal periodic distributions are an arrangement that an IRA owner may enter with the account administrator that creates a stream of annual distributions prior to age 59½. The distributions under this arrangement are exempt from the 10 percent penalty.

2) Roth Advantage No. 1

If you own a Roth IRA, you will not be taxed or penalized for taking distributions because the contributions to the account were taxed at the outset. Earnings were allowed to grow tax-deferred, and may be distributed tax-free if you satisfy certain distribution criteria (qualified distributions).

3) Roth Advantage No. 2

Additionally, Roth IRA owners aren’t required to take required minimum distributions.

4) Required Minimum Distributions

Otherwise, as in a Traditional IRA, once you reach age 70½, the IRS requires you to begin taking annual distributions, also known as required minimum distributions (RMDs). If you do not withdraw the specified amounts, you face a penalty of 50 percent of the required amount you fail to take out.

5) Calculating RMDs

There are two different ways to calculate RMDs. The way that applies to you largely depends on whether your beneficiary is a spouse and if your spouse is more than 10 years younger that you. Keep in mind you may always distribute an amount larger than what is required. You may also satisfy the distribution from another IRA you  own at another institution. Knowing your RMD amount is a helpful tool to accurately plan your retirement income.

6) Uniform Lifetime Table

The Uniform Lifetime table is generally the table used to calculate an individual’s RMD, even if the spouse is the beneficiary, as long as the spouse is not greater than 10 years younger. View the IRS’ Uniform Lifetime Table.

7) Joint Life and Last Survivor Table

The Joint Life and Last Survivor table is used when the beneficiary of the self-directed IRA is the spouse, and is more than 10 years younger than the IRA owner. This calculation table was designed to stretch retirement funds over a longer period of time to support the intended beneficiary, as well as the owner. View the IRS’ Joint Life and Last Survivor Table.

If you want to know more about the various legal caveats that surround taking distributions from self-directed IRAs, please contact us. 

 

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