One of the best things about a self-directed IRA is that your retirement dollars can work in assets you know and believe in, like rental property, private notes, or a stake in a business. But once you reach RMD age, those same assets raise a practical question: where does the cash come from?
Required minimum distributions don’t wait for the right market or the right buyer. If your IRA is mostly real estate or other illiquid assets and you haven’t planned ahead, you could find yourself scrambling in December, or worse, selling a property on someone else’s timeline. The good news is that with a little planning, you can keep your investments working and still meet your RMD comfortably.
Start With the Math
Your RMD is calculated by taking your account’s fair market value on December 31 of the prior year and dividing it by a life expectancy factor from the IRS tables. In practical terms, the percentage you need to withdraw starts at a little under 4% around age 73 and rises each year, to roughly 5% at 80 and over 6% at 85.
Here’s a simple example. Say your IRA is worth $400,000 at 75, made up of a rental property valued at $360,000 and $40,000 in cash. Your RMD would be about $16,260. If that rental brings in $1,200 a month after expenses, the property alone produces roughly $14,400 a year. Add a modest cash reserve, and your RMD is covered without touching the property.
That’s the goal: know your number early, then make sure your IRA’s cash flow can meet it.
Strategy 1: Keep a Cash Cushion
A cash reserve inside your IRA is the simplest safety net. Many account holders aim to keep at least one year’s RMD in cash, plus enough to cover the property’s ongoing expenses, such as property taxes, insurance, repairs, and account fees.
Why include expenses? Because every cost tied to an IRA-owned asset must be paid from the IRA itself. You can’t reach into your personal checking account to cover a surprise roof repair, so the IRA needs its own breathing room. A cushion keeps both your RMD and your property on solid footing.
Strategy 2: Let Rental Income Do the Work
If your IRA owns rental property, the rent flows back into your IRA, not to you personally. Over the course of a year, that income can quietly build up enough cash to cover your RMD.
The key is paying attention to timing. Map out when rent comes in, when big expenses like annual property tax bills are due, and when you plan to take your distribution. Many people with rental-heavy IRAs take their RMD later in the year, after the income has had time to accumulate.
Strategy 3: Use Note Payments
Private notes can be a natural fit for the RMD years. Each payment of principal and interest goes back into your IRA, creating steady, predictable cash.
If you’re still building your portfolio, you may want to think about how your notes are structured. Loans that pay monthly create a regular stream of cash, while notes with a large balloon payment deliver a lump sum on a specific date. Some investors deliberately time maturities so cash arrives ahead of their RMD years.
Strategy 4: Look at Your Other Accounts
If you have more than one traditional IRA, you can generally calculate the RMD for each one, add them together, and take the total from any one account or any combination. That means a brokerage IRA holding cash could satisfy the RMD for your self-directed IRA too, leaving your real estate untouched.
Keep in mind that this flexibility doesn’t extend to 401(k) plans. Each 401(k), including an owner-only 401(k), generally has to satisfy its own RMD. And Roth IRAs don’t require distributions during the original owner’s lifetime at all.
Strategy 5: Keep In-Kind Distributions in Your Back Pocket
If cash is tight in a given year, you may be able to take your RMD in-kind. Instead of selling, your IRA transfers a portion of the asset, like a percentage interest in a property or part of a note, directly to you. The value of what you receive counts toward your RMD and is taxed as income, just like cash.
In-kind distributions work best as a planned option rather than a last-minute fix, since they typically require a current valuation and paperwork that takes time to complete.
Strategy 6: Sell on Your Timeline
Sometimes selling an asset is the right move, and that’s perfectly fine. The difference is whether you choose when to sell or your RMD chooses for you.
If you expect to eventually sell a property, consider starting that process well before you need the cash. And as you approach your RMD years, think about liquidity when you evaluate new investments. An asset you’ll hold for 15 years may look different at 72 than it did at 55.
Build Your Plan Before You Need It
The best time to prepare for RMDs is a few years before they start. A simple annual check-in can go a long way:
- Estimate next year’s RMD using your current account value.
- Compare it to the cash and income your IRA expects to generate.
- Decide how you’ll cover any gap, whether through a cash cushion, another account, or an in-kind distribution.
- Keep your year-end valuations current so your calculations are accurate.
How MidAtlantic IRA Can Help
Our team works with self-directed account holders every day, including many whose IRAs hold real estate and notes. We’re happy to walk you through how RMDs work for your account, what information we’ll need, and your options for taking the distribution.
Because every situation is unique, we always recommend reviewing your plan with your CPA or financial advisor. MidAtlantic IRA doesn’t provide tax, legal, or investment advice, but we’re here to help you understand the process and feel confident about what’s ahead.
Want to talk through your RMD plan? Schedule a call with our team and let’s make a plan together.