Guide to self-directed IRAs & taxes
Key Takeaways:
- Earnings and growth within an SDIRA are typically tax-deferred or tax-free, allowing for tax-advantaged retirement savings.
- Withdrawals from a Roth SDIRA are tax and penalty-free after age 59.5 and 5 years of account ownership, while traditional SDIRA withdrawals only avoid early penalties but are taxed as income.
- SDIRA holders must report fair market value to their custodian annually. Required minimum distributions are calculated based on this value.
The rules around Self-Directed Individual Retirement Accounts (SDIRAs) and taxes are as follows:
Tax-advantaged earnings
Earnings and growth within a SDIRA are typically not subject to annual taxes, allowing investments to grow tax-deferred or tax-free depending on whether the account is a traditional or Roth IRA. This provides a tax-advantaged way for investors to save and invest for retirement.
Withdrawals
Withdrawals from a Roth SDIRA are tax and penalty-free after age 59.5, provided the account has been open for at least five years. However, withdrawals from a traditional SDIRA, while penalty-free starting at age 59.5, are subject to ordinary income taxes. The withdrawn amount is treated as taxable income for that year.
Prohibited transactions
Engaging in prohibited transactions, such as self-dealing, or transacting with “disqualified persons,” can lead to severe tax consequences for an SDIRA, potentially making the entire transaction immediately taxable. Violating IRS rules for assets held in an SDIRA could cause the account to lose its tax-advantaged status. Only permitted assets are available for IRA purchase through Yieldstreet.
Annual reporting
While SDIRA holders do not need to file an annual tax return, they must provide their SDIRA custodian with the fair market value (FMV) of their account each year. Yieldstreet provides updated valuations to Equity Trust for alternative assets held in SDIRAs. If account holders are scheduled to take a required minimum distribution (RMD), the RMD amount is calculated based on the account’s FMV.
It is essential for investors to understand and follow the rules for specific assets held in an SDIRA, as inadvertently violating these rules can lead to severe tax penalties.
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