IRA Required Minimum Distributions: Taking Your First RMD at Age 70.5
Most Traditional IRA owners are familiar with the concept of a required minimum distribution (RMD)—and if not, they should be. Starting at age 70.5, account holders are required to remove a portion of assets from their IRAs each year as a distribution. It’s important to note that in most cases RMDs apply to Traditional IRAs, not their Roth IRA counterparts.
Given that there are significant penalties for not fulfilling your RMD requirement during the correct timeframe, the following is a look at the rules for taking your RMD at 70.5 and beyond—especially if you hold alternative assets in a self-directed IRA.
IRA Distribution Rules: RMDs at Age 70.5
Your first RMD must be taken by April 1st of the year following the year in which you turn 70.5. For all subsequent years, required minimum distributions must be taken by Dec. 31st. For example, if you turned 70.5 in 2017, you have until April 1st, 2018 to take your first distribution and December 31st, 2018, to take your next one. If you do not take your RMD during the correct timeframe, the non-distributed portion of your RMD could potentially be taxed at 50%.
For IRAs, your distribution is determined based on your age, your IRA’s previous year account balance, and a “withdrawal factor” that is primarily based on life expectancy. There are many RMD calculators that can help you predict your next distribution, but the institution(s) where you hold your account(s) will also do it for you. However, institutions can’t see all the IRAs you may hold in other places, so it’s ultimately your responsibility to determine the total RMD amount for all of your accounts.
RMDs and the ‘In-Kind’ Method
Investors typically satisfy their RMDs using cash from an IRA. However, RMDs and distributions in general can be trickier for investors who own a traditional self-directed IRA that is invested in an illiquid asset such as real estate or private stock. One solution is to take the distribution in-kind.
For example, let’s say you own 100% of a piece of property in your IRA that’s worth $100,000, and your RMD is $10,000. You can distribute $10,000 worth of said property to yourself via grant deed or quitclaim deed. Essentially, your self-directed IRA custodian assigns that portion of the property to you personally, and that would satisfy your required minimum distribution for the year. This can work for mortgage-backed notes as well, where the custodian writes a partial Assignment of Deed of Trust/Mortgage to the account holder personally for the amount of the RMD.
RMD Resources for Self-Directed IRA Investors
Whether you hold a traditional or self-directed IRA (or both), RMDs are a fact of life and RMD requirements need to be taken seriously. The good news is that there are a few options available that can allow you to meet the IRS regulations without compromising your investment strategy. At PENSCO, we have a number of resources to help you prepare and understand RMDs once you reach age 70.5.
Here are a few:
- IRA Withdrawal Rules: Taking Distributions From a Traditional IRA
- Your IRA Required Minimum Distribution: You Asked. We Answered.
- The Real Estate IRA Investor and RMDs
- The Private Stock IRA Investor’s Guide to RMDs
- Using Your RMD to Make a Tax-Free Charitable Distribution from Your IRA
If you have questions about starting your RMDs at age 70.5 or taking an IRA withdrawal from your PENSCO self-directed IRA, you can contact us at 800.962.4238. The IRS also has an FAQ page addressing IRA withdrawals.
Editor’s Note: This is an updated version of a post we originally published in February 2014. We welcome new comments and questions below.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.