RMDs and Roth Conversions: The Self-Directed IRA Decisions Baby Boomers Can't Postpone
Key Takeaways
A $1.8 million SDIRA in rental real estate can require between $67,900 and $73,200 in forced RMDs each year, depending on your age, and that cash has to come from somewhere if the assets are illiquid.
Converting real estate or private notes to Roth only gets harder once RMDs start. The years right before your RMD age are the cheapest window you’ll have to do it.
A self-directed IRA holding real estate or private lending notes hands your heirs income, and you have the power to shape how long that income lasts.
Each year, I work with a new wave of Baby Boomer clients crossing into the Required Minimum Distribution (RMD) phase of their self-directed IRA. Some built their accounts around a handful of rental properties, while others hold private lending notes or a piece of a syndication deal.
The moment RMDs start, the asset math changes, whether the client is ready or not.
I wrote this piece for you, the SDIRA owner, rather than your heirs. I’ve already covered what happens to your inherited IRA trust structures after you’re gone. This is about the decisions that are yours to make while you’re still around: your RMD timeline, Roth conversion window, and how real assets pass differently than brokerage accounts do.
Your RMD Age is Now a Countdown
The SECURE 2.0 Act split the RMD start age by birth year, and most Baby Boomers fall on one side or the other of a hard line. If you were born between 1951 and 1959, your RMDs begin at 73.
If you were born in 1960 or later, you get until 75.
This makes a bigger difference within a self-directed IRA than it does in a mutual fund account. Selling 4% of an index fund to satisfy an RMD takes minutes, but satisfying an RMD from a rental property or private note requires cash sitting somewhere in the account, ready to move. Otherwise, it needs to be a distribution of the asset itself.
Consider a $1.8 million traditional SDIRA holding rental real estate. At age 73, the IRS Uniform Lifetime Table divisor is 26.5, which puts that year’s RMD at roughly $67,900. Two years later, at 75, the divisor drops to 24.6 and pushes the RMD to about $73,200 on the same balance.
If your properties are fully leveraged with no cash reserve, you’re forced into a sale, a partial distribution of the property itself, or a scramble for liquidity. Missing the RMD altogether carries a 25% tax on the shortfall (cut to 10% if you correct it within two years), and simply planning for the withdrawal in advance avoids it.
I’ve said this for years about maintenance reserves, and it applies here, too: build the cash cushion into the account before the IRS requires you to move illiquid money.
The Roth Conversion Window Closes When RMDs Start
Once RMDs begin, you lose your best leverage point. The years between when you stop earning a full salary and when your RMD age arrives are typically your lowest-income years, which makes them the cheapest years for converting traditional SDIRA holdings to Roth.
Say you convert a $400,000 private lending note portfolio in your traditional SDIRA to Roth, and you land in a 24% effective bracket that year.
That’s a $96,000 tax bill today. But in exchange, that $400,000 and everything it earns going forward grows and distributes tax-free, with no RMD ever forcing a sale and no future tax bill stacking on top of Social Security and other retirement income.
Converting real assets is more involved than converting a stock position. You’ll need a defensible valuation of the property or note, sometimes an independent appraisal, and a custodian who can properly document the conversion for the IRS.
AI-driven planning tools can model conversion scenarios in seconds for a standard brokerage IRA, but they don’t know what your rental property is worth today or whether your private note is performing. That judgment still requires a conversation.
Your Heirs Inherit More Than a Balance. They Get Cash Flow.
An annuity’s payments stop the day you pass. Real estate is like an annuity, but much better, because a rental property or performing private note held inside your SDIRA keeps generating income. Under the SECURE Act’s 10-year rule, your beneficiaries can collect that income for up to a decade before the account must be fully distributed.
That’s a materially different inheritance than the one a brokerage IRA passes down. Now, your heirs inherit compliance responsibilities along with the income stream.
Every dollar must still flow through the inherited IRA, and none of the prohibited transaction rules disappear when ownership changes.
The conversion decision determines what kind of income — tax-deferred or tax-free — you’re handing to the next generation.
Beneficiary Designations Hold It All Together
None of the planning we’ve covered so far matters if your beneficiary designation form doesn’t reflect your current wishes.
This form supersedes your will, and I’ve seen it override decades of otherwise careful estate planning. I’ve written separately about inherited IRA trust structures and the four-part IRS test a trust must meet to qualify.
You can find those here and here.
How Chicago Trust Administration Services Can Help
Your RMD age is fixed by your birth year, but what you do beforehand is not. The conversion decisions, liquidity planning, and beneficiary review all have to happen while you’re the one holding the pen.
At Chicago Trust Administration Services, we administer the structure behind these decisions. We’re not financial advisors, so we won’t tell you whether to convert or how much. But what we can do is make sure whatever you decide is executed correctly and in compliance.
To talk through how your RMD timeline, Roth conversion options, and beneficiary structure fit together, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
Frequently Asked Questions (FAQs)
Q: Can I satisfy my RMD by distributing a portion of a rental property itself instead of cash?
A: Yes, this is called an in-kind distribution. You can distribute an undivided percentage interest in the property out of the IRA to satisfy the RMD — though you’ll need a current valuation, and your custodian will need to retitle that portion outside the IRA. Most clients prefer maintaining a cash reserve instead, as there’s less of an ongoing recordkeeping obligation.
Q: If I convert only part of my traditional SDIRA to Roth, does that reduce my RMD proportionally?
A: Yes. RMDs are calculated only on your traditional IRA balance. Any amount you convert to Roth comes out of that balance, and future RMD calculations exclude it as well.
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.