Most of the planning that people do for retirement is on the “front end” – that is, whether to set up a traditional IRA or Roth IRA, choosing the right custodian for their self-directed IRA, and figuring out how to maximize their contributions each year. There’s also a lot of thought given to ongoing management for IRAs, in the form of choosing investments for the account.
While this type of planning is clearly important, some individuals neglect the “back end” planning; how and when they’re going to take withdrawals from their accounts. These issues are particularly important when you have a self-directed IRA.
Beginning Early.
While it might seem somewhat unnecessary, the process of planning and managing withdrawals from your self-directed IRA begins very early. In some cases this planning should start when you first set up your account.
Identify the Purpose of Your Self-Directed IRA.
What’s the purpose of your self-directed IRA? If it’s your primary investment vehicle, then you are likely to approach your withdrawal planning with an eye towards making sure you have a dependable source of current income once you stop working. If your self-directed IRA is a supplement to a larger 401(k) plan you have, then you may plan to keep your withdrawals to a minimum so that you can use your self-directed IRA to accomplish any estate planning goals that you may have.
The Issue of Required Minimum Distributions.
If your self-directed IRA is set up as a traditional IRA, then you are subject to the IRS rules on required minimum distributions (“RMDs”). The RMD rules state that wants an account holder reaches age 72, they must begin withdrawing certain minimum amounts from their account each year. The amount of the required minimum withdrawal varies each year, depending on the life expectancy of the individual and the balance in their account. If you hold a traditional IRA, then your planning must account for these RMD obligations. Note that a self-directed Roth IRA is not subject to the rules on RMDs.
Considerations for Certain Investments.
As you make your plan for withdrawals, keep in mind any liquidity issues that may be presented by investments that you hold in your self-directed IRA. For example, if your plan calls for a distribution in a particular year (either because that’s what’s consistent with your overall retirement plan, or because you are subject to the rules on RMDs), but your portfolio consists mainly of real estate holdings, you may need to sell a particular property in order to satisfy that withdrawal. If this is not well planned out in advance, you could be forced to sell a property under unfavorable terms.
Finally, be sure that you know what you’re doing with the funds you distribute your self-directed IRA. One common method is to have a designated savings or brokerage account that’s ready to receive those funds – just be sure that the amount of FDIC, SIPC or other applicable account insurance coverage is adequate.
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