What is a Roth IRA, and why do investment professionals recommend it so vigorously? If you are new to retirement advice, you’ve probably heard this phrase “Roth IRA” and rolled your eyes. It sounds complicated. It sounds like another worry in your life. Yet when you realize the potential in a Self-Directed Roth IRA, you might just begin to feel excited about your potential for building a strong retirement nest egg.
Why? Because the Self-Directed IRA comes with a number of benefits that you might not have considered:
Money in a Self-Directed Roth IRA Grows Tax-Free
When you put money in a Self-Directed Roth IRA, you are putting in your own after-tax dollars. That means these dollars have already been taxed. The tax protections in a Roth IRA then allow these dollars to grow tax-free with the full protections of an IRA. This is a reversal of the typical situation in which you withdraw retirement money and pay taxes on it then.
When you withdraw your money from your Roth IRA past the appropriate age, that money will be tax-free. It’s not difficult to see why this might help you save thousands—and maybe more—in the future.
Money within a Self-Directed Roth IRA Includes Tax Protections
A Roth IRA is a type of account the government approves for certain tax protections, encouraging people to save for retirement.
Usually, people take advantage of this account by investing in stocks and mutual funds. But with a Self-Directed IRA, you can do much more. You can even invest in real estate. And the real estate you invest in through a Self-Directed IRA allows your rental income to go to that Roth IRA, where it will receive protections.
That means you are not paying taxes on your rental income, which gives you more flexibility for making a profit on your real estate investments.
Hedging Yourself Against Future Rises in Taxes
When you earn a lot of income from investments, you face the possibility of a higher tax burden. By placing your rental income in a tax-protected Self-Directed Roth IRA, however, you hedge against the possibility of future tax hikes and give yourself some freedom and flexibility for your retirement investments.
The good news about Self-Directed Roth IRAs is that you will also have the ability to continue contributions so long as you have a paycheck or even contract work. So even as you protect yourself against future tax hikes and a potentially higher tax burden, you can still find ways to place some legal protections on yourself and your nest egg.
The Older You Get, the More Powerful a Roth IRA Becomes
Perhaps the most important feature of the Self-Directed Roth IRA is that it means paying your taxes upfront. As the investments grow tax-free, and you earn more money, you would likely have a higher tax burden. But withdrawing from your Roth IRA past the approved age is easy to do and tax-free. That gives you potential for a tax-free income in retirement, which is essentially like creating your own retirement program or pension.
Real estate is particularly effective in a Self-Directed Roth IRA because it has such high potential to grow—and a Roth IRA is great at protecting assets that grow. If you are looking into retirement investment or even just real estate investment, it’s always a good idea to consider a Self-Directed Roth IRA.