You might believe that finding the best way to accumulate funds for retirement is difficult. Well, guess what? Withdrawing those funds is just as hard–if not harder–if you want to do it in a tax-savvy way. Failure to meet this challenge could result in you losing over half of your retirement money to income, estate, and state taxes.
Taking your distributions too early or failing to take the required distributions from your traditional Self-Directed IRA are the two most common and costly mistakes that retirement savers make. Here are seven tips to help you avoid financial disaster:
- Taking money from your Self-Directed IRA too soon can be expensive
Even though you are allowed to take distributions from your traditional Self-Directed IRA at any time, you almost always need to be 59½ years old to avoid a 10 percent early withdrawal penalty. And that penalty is in addition to the income taxes you will owe.
There are, however, some exceptions that will waive the penalty:
- You become disabled
- You have medical expenses that are greater than 10 percent of your adjusted gross income
- You use the money for qualified education expenses
- You convert your Traditional IRA to a Roth IRA
- You purchase your first house with the funds
- If you die, the balance in your Self-Directed IRA account is paid to your beneficiary without penalty
There are other exceptions, so talk to your accountant to make sure that you qualify.
- Become familiar with the rules for Required Minimum Distributions (RMD)
You must take your first RMD by April 1st of the year after you turn 70 ½. So, if you turned 70 ½ in 2018, you have until April 1st of 2019 to make your initial withdrawal. From then on, you have until December 31st. Do not take this rule lightly: The penalty for missing the deadline or taking out less than the required amount is a heart-stopping 50 percent excise tax!
- You will probably be using the Uniform Lifetime Table to calculate your RMD
Unless your spouse is more than ten years younger than you are, you will be using the IRS’s Uniform Lifetime Table to determine your withdrawals. Remember, these are the minimum amounts you must withdraw. You can always take more.
If you have IRAs at several institutions, it doesn’t matter from which of these you take the distributions, as long as all of them add up to the required amount. That’s why it’s essential that you know your RMD numbers, so there is no confusion when multiple institutions hold your accounts.
- Your RMD could be smaller if your spouse is significantly younger
If your spouse is more than ten years younger than you, the Joint Life and Last Survivor Table will allow you to make smaller RMD withdrawals. For example, a retiree turning 70 ½ this year and makes his first withdrawal next April will have a life expectancy of 26 ½ years. If, however, he had a 56-year-old wife, their joint life expectancy would jump to over 30 years, and their annual RMD would fall from about $7,550 to $6,650 on a $200,000 account.
- Consider a Roth IRA
The beauty of the Roth is that you are not taxed on withdrawals and are not required to take minimum distributions. If you own a Traditional IRA, it might make sense to convert to a Roth, but do not do it without consulting a tax advisor. Depending on your age and the goals you have for your retirement funds, it may not be your best move.
- You are allowed to make “in-kind” withdrawals from your Self-Directed IRA
Maybe you have some assets in your Self-Directed IRA that you prefer to keep. In-kind distributions make it possible for you to move these assets into a taxable account without first turning them into cash. The assets are assigned a fair market value when they are moved and will count toward your RMD.
Let us help you reach your retirement goals
At American IRA, we believe that Self-Directed IRAs are the best vehicles for growing your retirement account. And we have the experience to handle your transactions, no matter which direction you choose to go with it.