What Happens to Your Self-Directed IRA When You Retire?

Imagine you've hit retirement age. You've been putting aside money every year, diligently planning your investments, and allowing it all to grow within a tax-protected Self-Directed IRA. You've been looking forward to this day so long, you kind of feel like you want to say two words: "Now what?" That's what today's post is all about: answers to the now-what questions of what happens if you have a Self-Directed IRA when reaching retirement age. In particular, we'll look at two key strategies: post-tax accounts like Roth IRAs, and pre-tax accounts like Traditional IRAs.

The Transition Into Distributions with a Self-Directed IRA

The big shift in retirement is when you move from contributions to distributions. With a Traditional Self-Directed IRA, you’ll have to start taking Required Minimum Distributions (RMDs) once you hit a certain age, an age that currently sits at 73. (A side note: you’ll probably want to start keeping abreast of the IRS rules for distributions, especially if you’re reaching retirement age, because some retirement rules can change from year to year.)

Switching to a withdrawal and distribution mindset means calculating how much to withdraw based on IRS tables and your account balance. These withdrawals are taxed as ordinary income, so you’ll want to plan ahead to minimize the impact.

If you have a Self-Directed Roth IRA, you’re in a far more flexible position. There are no RMDs for the original account holder, and withdrawals are generally tax-free as long as you’ve followed the rules. That makes Roth accounts especially attractive for people who want to let their investments grow longer or who want more control over their taxable income in retirement.

Managing Assets During Retirement

One of the unique challenges with Self-Directed IRAs is that you might own illiquid or non-traditional assets, like rental properties or private companies. So when it’s time to take distributions, you can’t always just sell a few stocks or mutual funds. You might need to get assets professionally appraised and then take an "in-kind" distribution—meaning you transfer ownership of the asset out of the IRA and into your personal name.

That requires some paperwork and good planning. That’s especially true because those distributions will be taxed based on fair market value if it’s a Traditional IRA. And yes, you can still manage or earn income from that asset once it’s out of the IRA—just not before.

As you get older, these are the kinds of considerations that you should think about: liquidity is going to become more of an issue if you need more immediate access to your retirement distributions. However, that isn’t to say that you should necessarily pick one asset over the other just yet. It just means that it’s time to talk over your goals with a financial planner.

Staying Strategic with a Self-Directed IRA

Retirement doesn’t mean your Self-Directed IRA stops being useful. It just means the strategy shifts. You move from building wealth to preserving it, and the tools at your disposal might change too. With the right approach, you can keep using alternative investments to generate income and grow your nest egg, even while drawing it down.

Just make sure you’re aware of the rules, particularly around taxes and distributions. A little planning now can go a long way toward making your retirement everything you hoped for. Interested in learning more about what the retirement rules say about what you can do after a certain age? Or are you well ahead of retirement age and want to get a head start on this entire process? If the answer to either question is “yes,” now’s the time to reach out to us here at American IRA by dialing 866-7500-IRA.