Self-Directed IRA – How To Calculate RMDs

If you own IRAs – whether a Self-Directed IRA or a conventional IRA you opened from a broker or fund company – and you turned age 70½ in 2015, your clock is running out.

You must take required minimum distributions from your conventional or Self-Directed IRA, 401(k), SEP or SIMPLE IRA.

If your 70th birthday fell between July of 2016 and the end of the year, then you must take your first RMD not later than April 1st, 2017.

Failure to take your required minimum distribution can have serious tax consequences. Generally, if you fail to take your RMD from your IRA or other qualified retirement account or tax-deferred retirement  account as required, you may face a penalty of up to half of the RMD you were required to take but didn’t – a tax called the excess accumulation penalty.

I own a Self-Directed IRA. How Can I Calculate My RMDs?

In most cases, if you own a standard, off-the-shelf investment company IRA, they will prompt you when it’s time to calculate RMDs. This may not be the case for Self-Directed IRAs. By their very nature, Self-Directed IRA owners tend to be more do-it-yourself-oriented than the mass market. But they are still subject to the same rules.

To calculate your required minimum distribution, visit one of these two pages:

Note that assets in Roth IRAs and designated Roth accounts in 401(k)s are not subjected to RMD requirements. After all, you already paid taxes on these assets!

RMDs and Self-Directed IRAs

Generally, the RMD requirement affects both conventional and Self-Directed IRAs equally. But unless they plan ahead, investors in Self-Directed IRAs may have challenges in meeting the requirement.

If your Self-Directed IRA assets are highly illiquid – for example, invested in real estate assets or other unusual assets that are difficult to sell quickly – it may be tough to come up with the cash to withdraw before the year-end deadline.

The alternative, if you can’t sell the property and raise the cash for the RMD, is to pay the 50 percent penalty on the RMD amount. The advantage is that you preserve the tax-deferred status of the account and the investment. Be sure to file an IRS Form 5329 to record the payment of the penalty

This is why we recommend having a tax expert in your corner, as well as an administrator or custodian with specific experience in Self-Directed IRAs.

Special Rules for Self-Directed IRA Owners

In some cases, individuals can own assets in partnership with their own IRAs or 401(k)s. In the event you own an undivided interest in real estate with your self-directed account, you can have a partial interest in your property deeded over to you from your IRA or 401(k). However, you should have a partnership agreement that allows for this type of transfer. However, this is one option that could help you deal with an illiquid asset in your IRA and the need to take an RMD by the end of the year, or by the 1 April deadline if you turned 70½ the previous year.

Note that anyone who owns assets in partnership with his or her own real estate IRA should pay very careful attention to prohibited transaction rules – or risk

If your account deeds a partial (or entire) interest to you, it generally counts as a distribution, and therefore subject to the same taxes and penalties that would normally apply.

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