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Taking Distributions from Your SDIRA: What You Should Know

Taking Distributions from Your SDIRA: What You Should Know

Taking Distributions from Your SDIRA: What You Should Know

Taking Distributions from Your SDIRA

After building up a secure self-directed IRA, you might be wondering when you can start to reap the benefits of your investments. After performing your due diligence, working with your IRA custodian, and setting up a solid portfolio, you have earned the right to enjoy what you put into your account.

Unfortunately, life is unpredictable. You may not have the chance to wait until you reach retirement age to benefit from your account. Of course, with early withdrawal comes a tax penalty, but there are certain situations that can bypass the tax hit. In addition, as you approach retirement age, there are fair amount of transactions that may take place depending on the type of account you have built. As you look to your golden years, here is what you should know about taking distributions from SDIRA.

Taking Distributions from Your SDIRA: What You Should Know

Golden Age of 59

IRA distributions occur when the account holder receives a payment from his or her fund. Any funds taken out must be claimed, especially if they were placed in a tax-deferred account like a traditional IRA. After this money is taken, account holders are free to enjoy what is left after the taxes are removed.

At the age of 59, you are close to being eligible to take distributions from your IRA without any early penalties. Depending on the type of IRA you have invested in, whether it is a Roth IRA or a traditional IRA, your withdrawals may be taxable. With Roth IRAs, your distributions are tax-free.

In addition, you can begin proceedings to retitle any real estate or property in your name following proper protocol. As you take distributions, the Fair Value Market must be updated, and it will be added to your income taxes the year you remove it from the retirement account. In order for this transaction to occur, you need to ask for the property exchange in writing.

As you age beyond 59, you don’t have to stop your account from growing. Your account can continue to build through rental income or other assets, but as you take funds, you have to be aware of any activity that may result in a prohibited transaction. As long as your property remains in the IRA and is growing, you have follow the rules set in place by the IRS.
After you reach age 70 ½, you have a required minimum distribution that must be taken from your account in the case of a traditional IRA.

Required Minimum Distributions

Required minimum distributions, or RMDs, are annual distributions you must take from your account. If the RMDs are not taken, your funds are eligible for a tax penalty. While these penalties are not applied to Roth IRA accounts, all traditional IRAs, traditional SEPs, and SIMPLE IRAs are subject to RMDs.

The penalty for not taking the required funds is 50% of the precise amount. These distribution amounts can vary depending on whether or not you have named a beneficiary on your account, such as a spouse. Depending on your beneficiary, the case of your sudden passing could result in an extended life on your SDIRA. If you wish to avoid these RMD penalties, it is possible for a Roth conversion.

Free Gift

The Roth IRA Advantage

If you own a Roth IRA, you already have an advantage over RMDS. You will not be taxed or penalized for any distributions, nor is there a distinct amount that must be taken annually. Earning can grow tax-deferred and taken tax-free as long as you hit a certain criteria. Should you choose a Roth conversion, a transfer from traditional IRA to Roth IRA, you can do so without the 10% tax penalty. If you wish to dodge any RMD penalties, it may be wise to consider this conversion.

Acceptable Early Withdrawal Circumstances

While the goal of any SDIRA is to safely and securely retire with a comfortable nest egg, sometimes life doesn’t allow us that opportunity. Should you have to dip into your IRA prematurely, there are several situations that bypass the 10% tax penalty.

Should you become disabled, or incur any medical expenses that exceed 10% of your adjusted gross income, you are eligible to take funds without penalty. Any medical insurance premiums paid in the case of unemployment are also penalty free. Additionally, if you qualify for educational expenses or build a first time home, you can withdraw from your retirement fund prematurely. You are also covered in the event of your death, as your account is passed to your beneficiary.

Performing Your Due Diligence

Though the future may seem far off, there is no better time to prepare than the present. As you move closer to retirement age, it’s important to be sure you are aware of any taxes or issues that may occur. When considering any investment, due diligence is the key to having a comfortable nest age.

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