May 26, 2023

Six Types of Self-Directed IRA Distributions

Written By: Daniel Gleich

Key Points 

  • There are six types of Self-Directed IRA distributions on Madison Trust’s Distribution Request form.
  • When taking an early distribution, it’s important to know whether your distribution qualifies for an exception to the 10% early withdrawal penalty that could apply.
  • When taking a distribution to roll over to another account, depositing the funds in the intended retirement account within 60 days will help you avoid an unnecessary penalty. Madison Trust is here to help every step of the way.

Can you take money out of a Self-Directed IRA? Many people ask this question before opening an account, thinking that a Self-Directed IRA might function differently than a standard IRA. However, the main difference is in the types of assets you can invest in and not the rules for distributions.

If you’re interested in the flexibility and versatility that a Self-Directed IRA allows in alternative investments such as real estate and private placements, you’ll be happy to hear that you can take distributions as needed or desired. Of course, you’ll want to be aware of what a given distribution might involve from a tax perspective to determine whether it fits with your financial goals. Here are the types of Self-Directed IRA distributions to know, as shown on Madison Trust’s Distribution Request form.

1. Normal Distribution

When you’re over the age of 59 ½, you can begin taking normal Self-Directed IRA distributions without paying any early withdrawal penalties. The same goes for the required minimum distributions (RMDs) from a Traditional IRA once you reach age 73.

You can receive distributions as cash by check or wire to a personal bank account, or distribute assets, such as real property. When distributing an asset, you’ll receive an Assignment of Interest stating that the asset will transition to your personal custody from that of your Self-Directed IRA custodian. For any distribution, we’ll issue IRS Form 1099-R for the tax year in which the distribution was taken to be filed with your personal taxes. You’ll pay the taxes owed on the distribution to the IRS come tax time.

2. Beneficiary Distribution

If you have inherited a Self-Directed IRA from a family member or spouse, there are important decisions and distribution guidelines to note before taking a distribution. You might consider completing a spousal transfer of the assets into an existing IRA, opening and transferring the assets into an Inherited IRA, or distributing all assets in the IRA as a lump sum.

The word "beneficiary" in the dictionary

3. Return of Excess/Ineligible Contribution

The IRS sets IRA contribution limits that apply to all retirement accounts including Self-Directed IRAs. For example, if you’re under the age of 50, the maximum amount that you can contribute to all your Traditional and Roth IRAs each year is $6,500. If you were to deposit, say, $7,000 in a given year, you would correct the excess contribution by taking a distribution of $500. Distributions for the return of excess contributions do not have the same tax implications as normal distributions since the initial contribution was made with personal funds that were already taxed.

4. Early Distribution

It’s possible to take early distributions from a Self-Directed IRA before the age of 59 ½ — but just like in a standard IRA, early distributions come with an early withdrawal penalty of 10% tax on the distributed amount. The distribution is also taxed as income based on your current tax bracket. If you’re taking an early distribution, consider including the penalty and tax in your financial planning for the year. With that said, it’s also possible that the reason for your early distribution could be in line with one of the IRS’ early distribution exceptions.

5. Early Distribution with Exception

The IRS has a list of over a dozen early distribution exceptions for retirement accounts in which the 10% penalty is not applied. The exceptions for IRAs include those corrective distributions that were previously mentioned, as well as qualified higher education expenses, qualified first home purchases, health insurance premiums paid while unemployed, and other life events.

Distribution form attached to a clipboard

If you believe you qualify for an exception, you can instruct your Self-Directed IRA custodian, such as Madison Trust, to list the exception with the distribution so that the IRS knows to send any related correspondence directly to you as the account holder. 

6. Distribution for Rollover

If you plan to roll over funds from your Self-Directed IRA to a qualified retirement plan, you can take a distribution without penalty as long as you deposit the distributed amount into the new account within 60 days. At Madison Trust, we ask for a signed Letter of Acceptance document provided by your qualified plan to process a distribution for rollover purposes. It’s a simple extra step that helps confirm you’re on track to complete a rollover correctly.

Understanding the different types of Self-Directed IRA distributions can help you go forward with confidence when opening your account. At Madison Trust, we’re committed to educating people on Self-Directed IRAs, from the assets you can invest in to how to properly complete distributions. Schedule a call with one of our Self-Directed IRA Specialists today!

Disclaimer: All the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Before making investment decisions, please consult the appropriate legal, tax, and investment professionals for advice.  

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