Self Investing IRA – The Tax-Free Way to Maximize Your Investment Earnings3 min read
Have you ever imagined that it was possible to double or even triple your current investment earnings without having to fork over a nickel to Uncle Sam in taxes? Believe it or not, it is possible…with a self investing IRA or 401(k). These two retirement savings accounts allow you to build wealth while saving on taxes. A self directed IRA or 401(k) are savings plans that give you the decision- making power when it comes to investing your contributions. With this type of control, you’re free to invest and reinvest, multiple times, maximizing your earnings.
One of the more popular investments individual’s make with their self managed savings accounts is real estate. Now this doesn’t mean you can buy a new home for yourself, or get a better rate on your present mortgage, but investing 401(k) money in real estate, or IRA money, is a way to buy and sell property for a profit. A self investing IRA keeps your money actively working for you, rather than passively sitting in the bank earning a minimum return.
When you set up a self investing IRA you will have to make a decision on how you are going to take the tax benefit provided by the government. What it boils down to is a “pay now” or “pay later” situation.
If you want to “pay now,” you can set up a self directed, Roth IRA, which is funded with money from income that has already been taxed. Any earnings you make from your investments remain tax free. For example, if you decide to invest in real estate, you can continue to invest and reinvest your earnings, multiple times, and the profits you make remain tax free. Even when you pull your money out at retirement, you won’t owe any taxes on your earnings. Your “already taxed” contributions can also be withdrawn, tax-free.
If you want to “pay later,” you would set up a traditional, self investing IRA, which is funded with money that you deduct from you taxable income for that year. Any earnings you make from your investments remain tax deferred, until you withdraw them at retirement. At that time, applicable taxes would be due. Just like with a self managed Roth IRA, you have the control to maximize your earnings by investing in a profitable vehicle like real estate.
Investing 401(k) money in real estate is no different from an IRA. The difference comes in the maximum amount the government allows you to put into each of these accounts. A self investing IRA is limited to a $5000 maximum contribution for 2008. The maximum allowable contribution to a self directed 401(k) is $15,500 for 2008. The “pay now” or “pay later” decision must also be made when setting up a self directed 401(k).
You will find that most financial institutions will discourage you from setting up a self investing IRA or 401(k). This is because they don’t want to lose the fees and profits they make from selling and managing their in-house investments.
If you want to set up one of these self managed accounts you’re going to have to find a company that specializes in managing these types of plans. These companies are there to take your investment orders and manage the hassle of the paperwork and regulation compliance.
Make no mistake about it. Owning a self investing IRA is going to mean taking an active role in determining your financial destiny. These savings accounts are not for people who can’t be bothered with the “hassle” and “uncertainty” of making investment decisions. But if you really want to take advantage of the fantastic opportunity to maximize your earnings and save on taxes, then a self investing IRA or 401(k) is the way to go.