Self-Directed Real Estate IRA Distributions: Things to Know
What is a Self-Directed Real Estate IRA? Simple: it’s a Self-Directed retirement account, such as a Self-Directed Roth IRA, in which you invest funds into real estate. Your ability to use a Self-Directed IRA also means you can access a wider range of potential asset classes, including not only real estate but tax liens and precious metals among others. The phrase “Real Estate” IRA is just a nickname for this style of investing. But what about Self-Directed Real Estate IRA distributions—the idea that when you have real estate in an IRA, you want to learn how to take that money out of the account? Here’s what you’ll need to know.
Self-Directed Real Estate IRA Distributions Work Like All Retirement Distributions
First things first: there are no special rules for investing in real estate in terms of how you take your distributions from a Self-Directed IRA. This means that while you can own real estate within a Self-Directed IRA, the mere fact that you own a Self-Directed IRA does not mean that you’ll be able to use special rules that allow you to take early distributions without taxes and penalties. The same rules apply for tax-protected retirement accounts; what happens in terms of your distributions is more dependent on the type of retirement account than it is the type of investment in the account.
How Do Retirement Distributions Work?
Retirement distributions are money you take out of a retirement account upon hitting retirement age, unless they are “early” distributions, which can create new taxes and penalties on the distribution. If you have a Roth IRA, for example, the funds are considered after-tax money. That means that when you take distributions from a Roth IRA upon hitting retirement age, that money is available to you tax-free: you have already paid the taxes on it, so no additional taxes are incurred.
On before-tax accounts, it may be different. Money you put into a Self-Directed Traditional IRA, for example, is considered before-tax money, meaning you can potentially take deductions on that money when contributing to the Traditional IRA. This means that the taxes are still owed on the money within the account—when you take funds out, that money is taxed like income. This is what gives a retirement account “tax-deferred” status, meaning that you can enjoy plenty of growth in the account in the meantime, but the obligation to pay taxes does not go away.
Self-Directed Real Estate IRA Distributions
Money in a Self-Directed Real Estate IRA can come from sale of a property, or from rent collected on the property, which then goes to the IRA. It’s then up to you how you take those distributions out of the IRA, depending on the rules. For example, there is no limit to when you can take distributions out of a Roth IRA after hitting retirement age, since that money is considered already taxed. However, for taxable money, you will eventually have to take RMDs, or required minimum distributions, during retirement, typically at around the age of 72.
Real estate can be a powerful way to save for retirement, but these questions make more sense when you understand that a Self-Directed IRA’s basic rules work like other IRAs. You will, however, be more responsible for understanding these rules. To help you with that part of the journey, you can work with an experienced Self-Directed IRA administration firm that knows how to handle paperwork and administration on the account. American IRA, for example, has been serving as a Self-Directed IRA custodian for years.
Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at www.AmericanIRA.com.