The retirement plan is simple: invest as much money as you can while you are working so that you can enjoy a retirement full of wealth and security. But when it comes to making individual decisions—which types of assets to invest in, which types of accounts to use—most people do not know where to start. But those who have used a Self-Directed Roth IRA often find that this one decision had such a dramatic impact on their ultimate bottom line that they almost wonder if the process should be more complicated.
Why focus on the Self-Directed Roth IRA? Because this is a unique retirement account type that makes it possible to build a tremendous amount of wealth over the long-term, which then adds up to unique abilities come retirement age. For those who are comfortable forgoing some short-term wealth for long-term rewards, the Self-Directed Roth IRA may just be one of the most intriguing ways to plan retirement. Here is what you will need to know:
Understanding the Self-Directed Roth IRA
A Self-Directed Roth IRA is a unique kind of retirement account. Self-Directed Roth IRAs were first introduced in the Taxpayer Relief Act of 1997—ultimately being named for Senator William Roth of Delaware. The best way to understand the Roth IRA is first to understand how a Traditional IRA works.
A Traditional IRA uses pre-tax dollars for contributions; you then pay your income taxes when you take distributions from the account. This is a tremendously beneficial plan because it affords the account holder with plenty of protections for their wealth, including the ability to use that pre-tax income.
The Self-Directed Roth IRA works in reverse. You use taxed income to make contributions to a Self-Directed Roth IRA, which then grow tax-free. Then, when you reach retirement age, you no longer have to pay taxes on that money, as you already paid taxes on the income when you first made the investments. The taxes you do not pay (legally) because of this arrangement can add up to tremendous stores of value, especially if you have made contributions to your Self-Directed Roth IRA throughout life.
Why the Self-Directed Roth IRA Functions Like an “Upgrade”?
Many people give priority to their Self-Directed Roth IRA because of the tremendous amount of wealth that it can build while growing tax-free. Because you have used money that was already taxed, the money you take in retirement is then tax-free, which means that the additional gains that came about because of your investments are then not tax, either. This can represent one of the most transformative and efficient ways to build wealth, as it gives you a large nest egg that will not be subject to further taxation so long as you follow the rules.
But it is also important to know those rules, including:
- You can take a “qualified distribution” only once you have contributed to a Self-Directed Roth IRA and five years has passed. This regulation is in place to ensure that people do not use the Self-Directed Roth IRA as a get-rich-quick scheme.
- The Self-Directed Roth IRA, like any Roth IRA, has relatively low contribution limits—$5,500 for those 49 and younger in 2018, and $6,500 for those 50 and older. However, it is important to take note of the higher “catch up” contribution limits, which means that even older investors closer to retirement can take advantage of the wealth-building present in a Self-Directed Roth IRA.
- Penalties on early distributions can be substantial, just like in any Self-Directed IRA, so do not get any delusions about how you will be expected to treat this account. Make no mistake: A Self-Directed Roth IRA is a retirement account like any other. It just so happens to have tremendous advantages.
The Self-Directed Roth IRA can be one of the most powerful ways to change the way you think about retirement. It can also serve as one of the most powerful upgrades to your retirement strategy. But because of the low contribution limits, the time to get started is now. For more information, contact American IRA at 866-7500-IRA, www.AmericanIRA.com or visit our Self-Directed Roth IRA page today.