You’ll likely spend decades accumulating a retirement nest egg in your self-directed IRA. You’ll work hard and try to make the maximum contributions year in and year out, in order to give yourself the best possible chance for retirement success.
But what you do once you actually reach retirement? Do you have a plan for how and when to begin taking money out of your account? Here are some of the best practices for managing withdrawals from your self-directed IRA.
Tap Non-IRA Accounts First. Regardless of whether your primary self-directed IRA is set up as a traditional account or a Roth account, the longer you can leave your money in the account, the longer you can take advantage of tax-deferred or tax-free growth. Many retirees therefore begin withdrawing retirement living expenses from their taxable investment accounts long before they begin to touch their IRAs.
If you have multiple IRAs and the choice is between a traditional IRA and a Roth IRA then you’ll need to weigh the fact that withdrawals from a traditional IRA will be taxable, whereas withdrawals from a Roth are not. (There may be other reasons, such as estate planning, that you decide to forgo withdrawals from your Roth for as long as possible.)
Which Assets to Liquidate. Another consideration will be deciding which assets within your self-directed IRA you want to liquidate in order to be able to withdraw your living expenses. You may wish to sell investments that you believe no longer have great growth prospects, or perhaps you’d rather sell off those assets where the transaction costs of selling are going to be low (such as publicly traded securities).
Keep in mind that for assets such as real estate, you don’t have to liquidate them in order to take a distribution. By having your custodian transfer title of the real estate from your self-directed IRA to your individual name, you will have taken the distribution simply by taking ownership of the property.
Managing Early Withdrawals. Even though we’ve been discussing the best practices for managing withdrawals during retirement, you may be faced with a situation where you need to take money out of your account before you reach age 59½. As you may know, you’ll be faced with a 10% penalty, as well as the possibility of current year taxation, depending on whether your self-directed IRA is set up as a traditional account or a Roth, unless the withdrawal satisfies one of the specified exemptions. The first best practice for making an early withdrawal before retirement is clear – do everything you can to stay within any exception you have available.
Plan Ahead. The most important piece of advice is valuable and important for virtually any investment or financial undertaking, and that’s to plan ahead. When you budget your expenses during retirement and stick to that budget you’ll be able to plan and manage your retirement account withdrawals better.