Question: How do I manage expenses and cash flow in an IRA,
particularly when I reach retirement age and have to take Required Minimum
Distributions (RMDs)?
Planning for investment cash flow needs is critical for any
investment strategy, particularly illiquid assets like real estate. Annual
contribution limits vary from over $50,000 with 401k and SEP-IRA plans down to
$3,150 for Health Savings Accounts (all of these plans may be self-directed and
are available at New Direction IRA.) The investor needs to determine how much cash will
be needed and how much will be available.
When you reach retirement age, you need to take RMDs. This
is sometimes tricky for people who only have real estate in their IRA—they’re
faced with the prospect of distributing a massive asset, which may incur a lot
of tax, to meet the RMD requirements.
Many of our clients choose to own more liquid assets in
addition to real estate, such as cash, securities or other alternative assets.
Clients also sometimes set up a reserve for unexpected expenses. This allows
them to be more flexible, particularly when it comes time to distribute their
assets yearly. It is also possible to take incremental “in-kind” distributions
of the property itself to satisfy the RMD requirement. This is done by
re-titling the real estate each year showing an increasing personal ownership.
Although this option may seem complicated it is done.
In addition, real estate is unique in that it can generate
cash flow for your IRA. By renting the property to tenants, some clients can
generate enough income to offset their RMD requirements.
Don’t forget that RMDs apply to Traditional IRAs and
regardless of what type of asset you hold, it’s only smart to have a plan for
how to accommodate these distribution requirements.
If you come across a situation where your IRA cannot afford
any incurred expenses, then you should make plans to sell it, bring in other
investors, liquidate other assets or make contributions. It is important that
you only use IRA funds for all expenses associated with the property including
taxes, repairs and insurance. You are not allowed to use personal funds to
cover these costs; if you do, your IRA may be disqualified by the IRS.
Like all investments, due diligence is required to decide
what will work best for your IRA and its investments. New Direction IRA can
help with the administration and bookkeeping of your IRA, and will ensure your
transactions and/or conversions are done according to IRS code.
Browse our website
for more answers to the most common questions and concerns we receive. NewDirection IRA is committed to providing you with the best education so you can
self-direct your IRA successfully.
