A Self-Directed IRA is a valuable tool for building retirement wealth. But like any retirement plan, the goal is not that you build as much wealth as possible. The goal is to build as much wealth as possible for your retirement. That means that your retirement goals are not just a number. They are also a timeline that you have to hit. And with the Self-Directed IRA RMD rules, you will want to be aware of when you should start withdrawing from your retirement account, so you do not lose your hard-earned wealth to tax penalties.
What are RMDs, Anyway?
RMDs are Required Minimum Distributions. According to the IRS: “Your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.”
That means that if you have a Self-Directed IRA, a Self-Directed SEP-IRA, or a Self-Directed SIMPLE IRA, you will be susceptible to the exact same rules. The same is true for Self-Directed Roth IRAs. As such, you will want to plan your Self-Directed IRA strategy around these RMD dates.
When Do I Have to Take Money Out of a Self-Directed IRA?
If there are RMDs for your account type, you will be expected to begin taking distributions during the year in which you turn age 70 ½. “However,” the IRS notes, “the first payment can be delayed until April 1 of the year following the year in which you turn 70 ½.”
That means that your retirement age—at least as it comes to withdrawing distributions out of your retirement account—will begin at around age 70. You are not required to stop working at this date. You are not required to have a retirement party. But you will have to start taking these distributions, which means that you will have to plan for what life is like at the age of 70.
Tax Considerations for RMDs
What will your income look like when you take RMDs? This can have a major impact on your tax considerations.
For a Roth IRA—which does not have RMDs—the question is simple. You can continue to allow the money to grow tax-free and accumulate, never having to take the money out until you are content to do so. That’s because a Roth IRA is structured so you pay taxes on the income you make when you put money away in the Roth IRA.
But for an account like a Traditional IRA, it is not so simple. You can defer taxes on this money, allowing the money to grow tax-free, and then pay taxes on the distributions.
For many people, that means planning on what your life will be like when you have to take out RMDs. Will you continue to be working? If so, the money can fall under high tax brackets. That’s why people who plan on having a larger income later in life can benefit from an arrangement like a Self-Directed Roth IRA, which allows them to have maximum tax protection later in life.
You do not have to target your retirement for a specific date, at least not at the age of 70 ½. But you do have to follow these rules. Plan your retirement by understanding these important dates and estimate what your income will be like when you hit your 70s. You will be glad you did.