There are going to be times when you’re required to take a distribution from your self-directed IRA. Whether the IRA was inherited or you’ve reached the maximum age, the IRS mandates that distributions be taken in order to satisfy the tax-deferred or tax-free status of the retirement account. This is generally known as an RMD (required minimum distribution).
Now, the RMD needs to be distributed from your account the exact same way that it’s reported to and enforced by the IRS. It also needs to be drawn directly from the IRA, not from the IRA Trust or the IRA LLC.
The question is: is there any way around that?
Most of us have a healthy skepticism toward anyone who claims to have found a legal loophole to what the IRS expects. On the other hand, what the IRS expects is not necessarily legally enforceable.
Taking Distributions from the IRA Trust or LLC?
It may not be readily apparent to anyone but a financial advisor, a tax attorney, or your IRA custodian for that matter, but IRA Trusts and LLCs are not themselves the retirement accounts. The LLC or trust is merely the means by which the IRA makes investments. It’s a vehicle. This distinction is useful because some IRA custodians believe that you can take distributions directly from the trust or the LLC.
But that’s not how distributions are taken.
Nonetheless, there is no specific law barring the practice. So the question then becomes: how would the IRS respond to an IRA owner receiving distributions, approved by the custodian, from the IRA LLC or Trust?
That’s just it. No one really knows. The fact is, distributions are supposed to be taken directly from the IRA. Not the trust and not the LLC. So why some custodians would risk distributing from investment vehicles is beyond me.
Still more baffling: what is the potential benefit of distributing through the LLC or trust? I can’t seem to find one. Maybe it’s less paperwork.
So why risk it?
Taking Distributions Safely
There are certainly times when custodians do things that the IRS doesn’t necessarily approve of, but there’s generally a potential payoff and a very good reason for fighting that battle. The IRS is the authority but they are still beholden to the law. They enforce the law, they don’t create or interpret it. Nonetheless, you want to pick your battles.
Safely taking a distribution from your IRA entails going through the process aboveboard. The process is as follows:
- Complete a deposit form that sends IRA Trust or LLC funds back to the custodial account.
- Take distribution.
See? It’s really not that hard, and the best part is, it won’t flag the IRS into looking more deeply into your investments.