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What are the tax consequences of an “early” withdrawal?

An “early” withdrawal is generally a withdrawal taken before age 59 1/2 in a Traditional IRA or within the first five years of a Roth IRA. In addition to the amount added to your income, the IRS may assess an additional 10% penalty. You should consult with your tax advisor regarding the tax consequences of taking an early withdrawal.


What is the tax consequence of taking a distribution?

Distributions from a Traditional IRA, SEP or SIMPLE are treated as income to you. You will receive an IRS form 1099R each January summarizing the amount distributed and the taxes withheld, if any. In a Roth IRA, if you take a distribution after the account has been open five years, the distribution will not be included in your income. If taken within the five-year period, it will be taxable, like a Traditional IRA distribution


When do I need to be concerned about UBTI or UDFI?

You may be required to pay UBTI (Unrelated Business Taxable Income) or UFDI (Unrelated Debt-Financed Income ) taxes if you use your IRA to invest or cover expenses for certain types of businesses or business activities. UBTI taxes may apply to you if you have investments in an LP or an LLC. It also may apply if your investments within your tax-advantaged account contain debt financing and has net income over $1000, or you wish to file for a net operating loss (NOL). For more information on the types of investments that may “trigger” a UBIT payment, you can consult the IRS’s guide to Unrelated Business Income.

You may also reach out to Forge Trust if you have any questions: as your custodian it is our responsibility to help you understand IRS regulations, although we may not give you advice on how to manage your accounts.

UDFI taxes are a subcategory of UBIT, and are triggered when an IRA acquires a debt as part of a real estate purchase transaction.

Both UBIT and UFDI triggers are covered by IRS Publication 598. If you need help understanding this topic we’d be happy to assist you.