IRA’s (Individual Retirement Accounts) were created by the government to provide an alternate way for people to invest in their retirement if their employer’s didn’t have a plan to offer.
Over the years, IRAs have grown to become the largest source of retirement savings in the country, accounting for over $7.8 trillion of retirement assets according to the Investment Company Institute as of the third quarter of 2016.
Surprisingly, many people are confused as to which type of IRA to invest in, and even less know what happens to their money once they do. The crash of 2008 was a horrific reminder of how volatile and unpredictable the financials markets can be, and millions of people were vulnerable to the collapse.
Some have recovered from the crash of 2008, but not fully. Some have still yet to see any recovery, and the growth of a little known instrument is breathing life once again in retirement savings, but this time with more control of it in the hands of the consumer, i.e. YOU!
Let’s begin with the two common IRAs,
• Funded with pre-tax dollars
• Tax-deferred investment growth while inside the account
• Taxable distributions when withdrawn from the account in retirement
• If qualified, investors receive a tax deduction for the amount contributed in a given year
• Subject to Required Minimum Distribution (RMD) requirements at age 70 ½
• Funded with after-tax dollars
• Tax-free investment growth while inside the account
• Tax-free distributions when withdrawn from the account in retirement
• Subject to certain income eligibility requirements
• Not subject to Required Minimum Distribution (RMD) requirements
Take note of the bolded bullets in each… While your money is safely growing within the accounts, what happens when you withdraw it, is what matters most. With traditional IRAs, you are taxed on the withdrawals. This is why most people have trouble once they are in retirement and living off their traditional IRAs. Often, the rate of inflation was too steep to match the growth of the account, and the withdraws are taxed, leaving even less for living.
However, in a Roth IRA, distributions are not taxed…they are TAX-FREE. Why? Because the money you had been putting into the account for all those years was already taxed before you made the deposit into the Roth IRA account, so the government cannot double tax you.
While the Roth IRA is a better solution for retirement savings than Traditional, it is not the best.
That accolade goes to the Self-Directed IRA. Let me explain…
The Self-Directed IRA
A Self-Directed by definition is an Individual Retirement Account (IRA), which allows alternative investments for retirement savings. This is a key differentiation and makes a difference in the planning of your estate.
Here are 3 critical reasons for having a Self-Directed IRA:
- You can invest in these types of equity holdings and receive favorable tax treatment:
- Real property (i.e. real estate)
- Issue a loan/promissory note secured by collateral
- Physical gold and other precious metals
- Tax liens
- LLCs — THIS IS HUGE! Especially, if your business is structured as an LLC. This could mean that some of your earned income can be TAX-FREE.*
2. Because this is a self directed IRA, you have You make the decisions associated with your account and can determine the strategy for your portfolio.
3. Minimal transaction fees. Of course, this depends on who is the custodian or administrator of your account. I recommend that you research Custodian of Self-Directed IRAs, as they are held to a higher standard of accountablity and you want to make sure that your account is handled ethically and according to the law.
Self-Directed IRAs are my personal favorite, but as always, I recommend you do your due diligence to see if this is something that would work within your wealth creation plan.
Until next time….
Here’s to Your Remarkable Life & Legacy!
*Please consult with your tax attorney,
CPA, financial advisor or other financial
professional before making any investment