If you have a Traditional IRA or another such pre-tax account, you may have heard that you'll one day be responsible for required minimum distributions (if you're not already). The IRS mandates partial distributions once you reach age 70 ½ as a means of collecting taxes on contributions and earnings that have been deferred over your investment lifetime. These transactions, the applicable taxes, and the gradual distribution of your account are worth considering, but shouldn't be a source of worry. You have options for easily managing your required minimum distributions. Completing the withdrawals can be relatively simple depending on your assets and you may be able to circumvent or avoid them altogether if you plan ahead.
Investments that generate regular cash returns can provide a simple avenue for executing your required minimum distributions without having to liquidate your holdings. Rental income, dividends from a private equity agreement, or payments from a secured or unsecured promissory note can build your IRA cash account and create pools of available funds for easy distribution.
If you don't have cash on hand, you can avoid liquidating your assets by distributing the assets themselves (at which point they would become your personal property). Although high-value investments like real estate can be withdrawn in kind, the distribution value and corresponding tax liability will likely exceed your required minimum by a notable margin. As such, smaller assets that don't generate cash returns (precious metals, for instance) may be better candidates for in-kind distributions. The fair market value of the asset(s) will be reported as income for tax purposes, so you'll want to ensure the in-kind distribution meets your required minimum.
If you have multiple pre-tax accounts, each one will carry required minimum distribution obligations. However, the IRS doesn't care which account the distribution comes from. For instance, if you have two Traditional IRAs and you must take $500 from each, you may distribute $750 from one and $250 from the other, the full $1,000 from one account and none from the other, or any other scenario that results in the satisfaction of the combined required minimum. Therefore, you needn't tap the cash or assets in your self-directed IRA if you have another pre-tax account you'd prefer to withdraw from.
If you're not 70 ½ and want to avoid required minimum distributions down the road, you may transfer your tax-deferred cash or assets to a tax-free account. This is most commonly achieved via Roth conversion. Anything you convert will be reported as income and subject to taxes in the same manner as a distribution. However, once in the Roth IRA, you'll never again be responsible for paying taxes on the converted assets. Your holdings may continue to grow, distributions could only occur at your election, and they can be 100% tax-free if qualified.
A Roth conversion can be an effective option in maintaining your IRA holdings if you don't intend to rely on your retirement funds for income. At the same time, you may create generational wealth by allowing the account to grow unimpeded. When you pass away, your beneficiary or beneficiaries will inherit the same tax advantages and may oversee the continued growth of the account as they see fit. Traditional IRAs offer no such advantages for non-spouse beneficiaries. If you inherit a tax-deferred IRA from anyone but a spouse, you'll be responsible for required minimum distributions regardless of your age (or the age of the previous account holder).
Please consult with your accountant or tax professional for assistance in calculating required minimum distributions. For more information about self-directed investing, please don't hesitate to give us a call at 877-742-1270 or send us an e-mail at email@example.com.