Keep Required Minimum Distributions in Mind When Investing in Real Estate With Your Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: November 30, 2018)

In the years and decades leading up to retirement, most savers are focused on accumulating as large of a retirement nest egg as possible, and guarding those investments against loss. Even after retirement, a great deal of attention is required to preserve your capital making sure that the retirement savings lasts throughout your retired life.

But for retirement savings that are held within an IRA, there is an additional factor to take into consideration – the rules regarding “required minimum distributions.” In summary, once the IRA account holder reaches age 70½, he or she must begin withdrawing a certain amount out of their IRA each year, regardless of whether he or she continues to work, has other sources of income or actually needs the money from the IRA in order to support themselves.

The amount of the required minimum distribution is calculated each year, based on the age (and therefore life expectancy) of the account holder, as well as the current balance in their account. The account holder is always free to take out more than the required minimum amount, but failure to take a distribution of at least the minimum amount will trigger penalties.

The logistics of taking a required minimum distribution are generally quite simple for IRAs held with traditional custodians; if there is not sufficient cash or money market funds in the account and then the account holder simply sells some stock or shares of a mutual fund that’s likely in their account in order to get the cash.

But there can be liquidity challenges if the retiree uses a self-directed IRA structure and holds real estate within that account. If the real estate is still generating cash flow from tenants, then that cash will often be enough to meet the required distribution amounts. But as the retiree gets older (and the required minimum distribution increases), it can be difficult to meet the distributions simply based on cash flow. In these cases, the retiree may need to sell the property and invest in more liquid assets in order to meet their distribution obligations.

Note that if the retirees take possession of the real estate held within the self-directed IRA, and begin using it themselves, then the account will likely be deemed to have made a distribution equal to the market value of the property. This will significantly reduce the burden of the required minimum distribution rules, but it will almost certainly result in a significant tax hit if the self-directed IRA was set up as a traditional IRA.

On the other hand, if the self-directed IRA was structured as a Roth IRA, then the required minimum distribution rules do not apply. Because Roth IRAs (including self-directed Roth IRAs) are funded with “after-tax” dollars, the IRS has already taken its tax bite and a retiree could take possession of real estate from their self-directed Roth IRA without having to pay taxes on the distribution.

Given the opportunities and potential advantages to be gained from a self-directed IRA, the required minimum distribution rules should not stop someone from holding real estate within that type of account. However, it is worth planning ahead to avoid running afoul of the required minimum distribution rules, or incurring any unexpected fees or taxes.

For personal assistance or to learn more about the important role that an investment can play in helping you achieve a more financially secure future, you may wish to consult a financial expert at Quest Trust Company, Inc. –