Whether you have an IRA LLC or an IRA Trust, there may be a times that you want or are required to take distributions from your self-directed IRA. Distributions from your self-directed IRA may be in the form of a “normal” taxable distribution from your traditional IRA, a tax-free distribution from your Roth IRA, or you may be taking a required minimum distribution (RMD) due to your age. The common theme is that the distribution is made from your IRA custodian account as it needs to be reported to the IRS…but, is that what all self-directed IRA custodians enforce??
While I do receive the occasional inquiry about the manner in which one should/must (in my humble opinion) take distributions from your self-directed IRA, I have to admit that I am writing this after hearing that a few custodians may (or have on occasion) permitted their IRA clients in taking distributions in a slightly odd manner that I certainly would not agree with.
I think it makes sense that people understand that when an individual utilizes an IRA LLC or IRA Trust structure, they do logically understand that neither the LLC or Trust is the actual IRA account. Sometimes I have to re-remind people of this, but they do understand that the LLC or Trust is the vehicle by which the IRA invests into either the LLC or Trust to control the investment options of the plan. One’s IRA is the member (LLC) or grantor (Trust). But, make no mistake, the LLC or Trust is not the IRA. So, why would anyone, including an IRA custodian, believe it is permissible to take an IRA distribution from the LLC or Trust (directly), when neither the LLC or Trust is the IRA account?!
Good question! I wondered the same thing!
In a couple of cases that I have heard about, the IRA custodians permitted the individual to take funds directly out of the LLC or Trust as long as the IRA account owner reported to the custodian the distribution. Okay, some of you will say, “well, if it was reported to the custodian and if the custodian reports the distribution to the IRS…like, who cares?!” Well, I am not sure how, nor would I predict the IRS’ response to this practice, but I am not sure why an individual or IRA custodian would risk any negative fallout from taking a distribution in this manner. I mean, let’s be blunt…the LLC or Trust is not the IRA. If the LLC or Trust is not the IRA, and a distribution must be from the IRA, what logic would suggest that a distribution could be taken from either entity. Unfortunately, my only guess is that when this occurs, the IRA custodian finds out “after the fact”, and simply takes the path of least resistance. But, as one might imagine, the IRA custodian and IRA account owner are going down a slippery path in taking this action.
Bottom line: When you want or are required to take a distribution from your IRA, you will complete an IRA deposit form sending LLC or Trust funds back to your IRA custodial account for deposit. Every IRA custodian will have such a form and you are able to indicate (code) why you are sending funds back. In this case returning funds back to the IRA account so the IRA custodian can process your subsequent IRA distribution request. Is it fun or efficient…no, not really. But, again, when you think of it logically, why would you ever think you can take an IRA distribution from an IRA LLC or IRA Trust account that your IRA has invested into?!
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. One must always consult with their respective professional in all such matters.