SD IRA - when can I start drawing income?

Question

I'm 56.  If I purchase a property through a SD IRA, can I start drawing income from it at 59 1/2?

Dmitriy Fomichenko · Answer

Pearce, the same tax and distribution rules apply to SD IRA as for conventional IRA. You are allowed to take distributions from your account at 59 1/2. You are required to take RMD at 70 1/2. You will be taxed on the amount of distribution you take out.

One caveat: you can't take rental income payments directly, the rent must be going into your IRA custodial account and then you take distribution from there.

Brian Eastman · Answer

@Dustin Haviland

What you propose would not work.

The IRS rules prohibit any direct or indirect benefit between a disqualified party and the plan.

The key disqualified parties include:

• Plan holder
• Their spouse
• Parents, grandparents, etc.
• Children, grandchildren, etc.
• The spouse of a descendant
• An entity such as a business or trust where one or more of the above have control via ownership or management authority.

A self-directed IRA is not a means for you to derive any income other than in the future when you take distributions from the account.  It is exactly like a more common mainstream IRA with respect to these matters - just with a different set of investment options.

Dmitriy Fomichenko · Answer

@Dustin Haviland,

according to the IRS rules any entity that disqualified person owns is also considered to be disqualified, here is a link to the IRS website explaining the rules:

https://www.irs.gov/retirement-plans/retirement-pl...

Dustin Haviland · Answer

@Dmitriy Fomichenko @George Blower This is an interesting topic. I haven't taken the time to discuss with my financial advisor but out of curiosity, if your SD IRA owned property is managed by Property Management ABC, LLC (and you're paying 10% management fee), can you have any ownership interest in Property Management ABC, LLC? In summation, I I'm looking to find out if the reason you cannot pay yourself as a property manager is because it is you individually, or if you are unable to have a financial interest in the party profiting from the payment of the SD IRA.

Dmitriy Fomichenko · Answer

Pearce,

the age doesn't change the Prohibited Transactions rules set by the IRS. So as long as the property remains in the IRA you must follow those rules.

You have an option of taking the property out as in-kind distribution. In this case you appraise the property and change the title to your personal name. The property value becomes taxable distribution. At this time it becomes your personal property and you are free to manage it or even live in it personally.

George Blower · Answer

@Pearce G.

Correct that you cannot pay yourself for managing the IRA owned property even once you reach retirement age.

Pearce G. · Answer

Got it.  Thank you @Dmitriy Fomichenko.

Would all the other "arms length" rules still apply after 59 1/2?  For example, would I still be prohibited from paying myself directly as the property manager?

George Blower · Answer

@Pearce G.

You can start taking IRA distributions now under the 72t rules (Substantially Equal Periodic Payments). See the following.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments

SD IRA - when can I start drawing income?

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