Required Minimum Distributions and Your Self-Directed IRA
Published on February 24, 2022
Congratulations! You’ve worked hard and have been disciplined about saving for your retirement in an IRA (or other retirement plans). Since the funds in your account are intended to support you in your retirement, you must eventually start taking Required Minimum Distributions (RMDs)—even if you plan to work well into your later years.
These mandatory annual distributions are based on the account balance at the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” This life expectancy table is used to calculate one’s required withdrawal amount for most IRA owners. (There are other tables for certain beneficiary arrangements and inherited IRAs.)
Account Types with RMDs
Just as the tax advantages of regular IRAs apply to self-directed IRAs, so do IRS rules about required minimum distributions. Taxpayers must take RMDs from a:
- Traditional IRA
- SIMPLE IRA
- SEP IRA
- Profit sharing plan
- Other defined contribution plan
Note that Roth IRAs do NOT require withdrawals until the account owner dies, once the account becomes an inherited IRA.
Mandatory age for starting distributions
Prior to the 2019 SECURE Act, the mandatory age for starting withdrawals was 70½. For anyone who turned 70 ½ prior to January 1, 2020, that still holds. The SECURE Act changed this age requirement effective calendar year 2020; now, retirement plan participants and IRA owners may wait until age 72 to start taking their RMDs.
For IRA owners, April 1 of the calendar year after you turn age 72 is the date you must begin taking your RMDs. If you turned 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you turn 72. All subsequent distributions must be taken by December 31 of each year. If you delay the first RMD, you will have to take two distributions in one year (with the tax implications associated with them).
Failure to take your required minimum distribution by the deadline is costly, with a 50% penalty imposed on the entire amount you were supposed to take.
How much must you withdraw?
The IRS provides worksheets to calculate your RMD amount. Certain life changes, timing of the withdrawal, and IRA rollovers and Roth conversions also factor into the RMD. The U.S. Securities and Exchange Commission has an online RMD calculator to simplify the process.
In general, your IRA distributions are part of your taxable income, excluding any part that was previously taxed or can be withdrawn tax-free (such as a Roth IRA distribution). Your trusted tax advisor can guide you on how to plan for this additional income and its tax implications. You can prepare yourself by reading more about RMDs on the IRS website.
Some helpful things to note:
- If you own multiple IRAs, you must calculate the RMD for each one, but you can take the total amount from just one account or any combination of IRAs.
- If you have multiple 401(k) plans, you must calculate and take distributions from each one.
Taking distributions from a self-directed IRA
If your self-directed IRA has enough cash available and you wish to take the RMD from that account, you must provide a distribution form to your account administrator or custodian—such as Next Generation—for the RMD amount.
However, self-directed retirement accounts tend to hold illiquid assets such as real estate, precious metals, and private equity. When the account lacks sufficient cash to meet the RMD due to illiquid assets, there are several options:
- Liquidate all (or a portion of) your investment to free up available cash, and withdraw cash to satisfy the RMD.
- Take an in-kind distribution, in which you distribute a percentage of your illiquid assets to yourself, in an amount that equals or exceeds the RMD amount. Depending on the asset, you may need an attorney to handle legal aspects of an in-kind transfer of shares.
- You are required to provide the fair market valuation (FMV) of those distributed shares to your IRA custodian (such as Next Generation Trust Company).
- The custodian then issues a 1099-R that documents the distributed asset’s value.
- You must include this amount as taxable income on your tax return.
Longer time to grow your self-directed IRA balance
As noted above, if you have a self-directed Roth IRA, you do not have to take RMDs. You may also continue to contribute to your Roth IRA after that age. However, you may no longer make regular contributions to a Traditional IRA after reaching the RMD age.
For owners of any type of self-directed retirement plan, a longer time horizon means:
- You can continue to grow your self-directed retirement savings for a longer period.
- There’s more time to build a more diverse retirement portfolio—and continued hedge against market volatility.
- The longer time horizon offers the potential to accrue more retirement income from alternative assets that often yield more stable long-term returns.
- In the case of illiquid assets, you have more time to plan for and structure the RMD withdrawals.
- You have greater potential to make opportunistic investments in alternative assets you know and understand—and take advantage of emerging investment trends.
Trust in the Next Generation Team
At Next Generation, we provide all of the information you need to learn more about the many types of self-directed retirement plans. As a full-service custodian and administrator for self-directed accounts, our team is here to answer any questions—whether it be from financial advisors assisting their clients, current clients inquiring about RMDs, or prospective clients looking to open an account.
You may call us at (888) 857-8058 or email NewAccounts@NextGenerationTrust.com. Alternatively, we invite you to schedule a complimentary educational session with a Next Generation representative or have a quick text chat at (848) 233-4076.