Can You Cash Out Your Self-Directed IRA?

Self-directed IRAs (SDIRAs) offer incredible flexibility for diversifying your retirement portfolio with alternative assets. But what happens if you need to access some of the funds in your account? Can you take an early distribution from your self-directed IRA? The answer is yes—but there are important considerations to keep in mind.

Types of Withdrawals

Understanding the rules for withdrawing from your self-directed IRA is crucial. The specifics depend on the type of IRA you have:

• Traditional IRA: Distributions from a Traditional IRA are taxed as ordinary income. If you’re under the age of 59?, you’ll also face a 10% early withdrawal penalty unless you meet certain exceptions (discussed below).
• Roth IRA: Contributions to a Roth IRA can be withdrawn tax and penalty-free at any time. However, withdrawing earnings is only tax and penalty-free if the account has been open for at least five years and you’re 59? or older or meet other qualifying conditions, such as a first-time home purchase.

Penalties for Early Withdrawal

If you’re under the age of 59?, early withdrawals generally incur a 10% penalty in addition to any income taxes owed. However, there are several exceptions where the penalty may not apply:

• Higher Education Expenses: Withdraw funds penalty-free to cover qualified educational costs for yourself, your spouse, children, or grandchildren.
• First-Time Home Purchase: You can withdraw up to $10,000 penalty-free to buy or build a first home.
• Medical Expenses: If unreimbursed medical expenses exceed 7.5% of your adjusted gross income (AGI), you can withdraw funds penalty-free.
• Other Qualifying Exceptions: These include disability, health insurance premiums while unemployed, or distributions made under certain qualified domestic relations orders (QDROs). Speak with your CPA to see if any of these might apply to you.

Required Minimum Distributions (RMDs)

For Traditional IRAs, you must begin taking Required Minimum Distributions (RMDs) by April 1 of the year after you turn 73 (effective as of 2025). RMDs are mandatory and subject to income tax. On the other hand, Roth IRAs do not have RMDs during the account holder’s lifetime, allowing your investments to grow tax-free for as long as you like.

Tax Implications of Cashing Out

When you withdraw funds from any IRA, the amount you take out will be added to your taxable income for the year. This could significantly impact your tax situation, especially if the withdrawal is large enough to push you into a higher tax bracket.

For example, if you’re in the 22% tax bracket and withdraw $50,000 from your Traditional IRA, you could owe $11,000 in federal taxes (not including any applicable state taxes). Planning withdrawals strategically or exploring other options can help mitigate these tax consequences.

Alternatives to Cashing Out

If you’re considering cashing out your SDIRA, explore these alternatives first:

• Rollovers and Transfers: If your primary goal is to move funds, you can roll over or Transfer your SDIRA to another retirement account, such as a Traditional or Roth IRA, without triggering taxes or penalties (as long as you follow the IRS rules).
• Loans: If you’re managing a Self-Directed Solo 401(k), you may be able to borrow against the plan. The maximum loan amount is the lesser of $50,000 or 50% of your account balance. This allows you to access funds without permanently depleting your retirement savings.

Final Thoughts

Cashing out your self-directed IRA is possible, but it’s not always the best option due to potential taxes and penalties. Before making a decision, consider your long-term financial goals and explore alternatives that allow you to preserve your retirement savings. Consulting with a financial advisor or tax professional can also help ensure you make an informed choice.

Have questions about self-directed IRAs? Contact us to learn more about the options available to you.

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This post is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor for personalized advice.

Mountain West IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If accounting, tax, legal, investment, or other similar expert assistance is required, the services of a competent professional should be sought.