If you're utilizing the ever-popular IRA LLC investing strategy (where your IRA owns an LLC, making all the investments through this entity), there may come a time you'll need to take a distribution from your account. But wait— if your funds are within the LLC, how do you handle this process? It's something that comes up often with self-directed IRAs, especially when handling required minimum distributions (RMDs). Here's what you'll need to know to manage this process simply and easily:
Distribution Rules and Requirements
Starting at 59 ½, you’re eligible to take what is referred to as a “normal distribution” from your IRA with no penalty. Before that, a 10% early distribution penalty will apply on top of other applicable taxes. There are some exceptions to this penalty— but this requires a specific waiver from the IRS. The amount distributed is reported as income and you pay taxes on that amount come April.
Once you’ve turned 70 ½, you must start taking required minimum distributions (unless you have a Roth IRA— as Roth accounts are post-tax). The amount is calculated based on the total value of all your retirement accounts, not just your self-directed IRA at IRA Resources. You must take the full amount of your RMD by the deadline, but you can take it from any of your accounts— so if you have available cash in another retirement account, you can distribute that to meet the requirement. Whatever your situation, make sure to take your RMD by the deadline (12/31)— otherwise there is a 50% penalty of your original RMD, AND you still must pay taxes on the entire amount.
All Cash Distributions
Distributing cash from your IRA LLC is straight forward. If you need to liquidate assets held in the LLC first, this is something you do yourself (like with all sales and purchases within an IRA LLC). Once you have the funds available, you’ll send them directly to IRA Resources.
If your LLC already has the funds available for distribution, go ahead and send the funds to IRA Resources. Do not distribute the cash directly to yourself— this is a prohibited transaction and can result in your entire IRA becoming disqualified (where you'll be taxed on the entire account). The funds have to come back to IRA Resources, so we can process the distribution for proper IRA reporting.
Once your funds have arrived at IRAR, you’ll need to submit a Distribution Form (outlining the details of your withdrawal) along with a completed Fair Market Valuation Form showing the value of the LLC, where we’ll then process the distribution from the IRA to you personally.
You also have the option of distributing the LLC (either partially or entirely) in-kind to yourself. The value of the LLC would be reported to the IRS as being distributed to you and you would change the ownership of the LLC from the IRA to yourself.
For this process, you'll need to submit a completed Distribution Form, outlining the percentage of the LLC to be distributed, and a Fair Market Valuation Form with the appropriate supporting documentation.
Unlike the traditional real estate IRA distribution process, if you hold real estate in your IRA LLC, there are no documents to be updated regarding your distributed properties, as the LLC still owns the assets even once distributed to you personally.
Once distributed, it's your responsibility to make sure the new ownership percentages are recorded. So, where previously the LLC was owned solely by your IRA (IRA Resources, Inc FBO John Doe IRA #XXXXX), now the LLC will be owned (either partially or fully) by you.
For example, if you were distributing 50% of the LLC to yourself, the members would be listed in the subdocuments as:
|IRA Resources FBO John Doe IRA #12345||50%|
But How Do I Value My LLC?
To complete the Fair Market Valuation Form for your IRA LLC, you combine the values of all the assets owned into a total value. You can obtain the values of these individual assets by using statements from investment providers, appraisals or a Comparative Market Analysis (for real estate), opinion letters from CPAs, and other similar statements of value. You do not need to provide IRA Resources with a list of every investment that you own within the LLC or send an individual FMV for each asset— we just need to know the total value of all the investments combined. If you're looking for additional resources on acceptable documentation or the process itself, our blog has more information on fair market valuations.
We need an updated value in order to distribute any or all of your IRA LLC. This is both because we are required to report taxable events (like distributions) to the IRS and because the value of your LLC is tied to the value of your distribution. For example, if your LLC is worth $100,000 and you choose to distribute 50%, you’d be taking a distribution of $50,000. But if your LLC had previously been valued at $200,000 and hadn’t been updated, a 50% distribution could be miscalculated at $100,000— leaving you to pay taxes on a much higher amount due to the inaccurate value.
Now you know how to take a distribution from your IRA LLC. Though it may seem complicated, it's not bad once you understand the process— and if you have any questions, IRA Resources is always there to help. Whether you're trying to take your required minimum distribution or not, we hope you feel more in control of the retirement process.