As most of you know, there are two types of IRAs, and they are distinctly different. The Traditional IRA, which is a tax-deferred account, allows you to take your deduction up front and pay your taxes later, presumably at retirement. The Self-Directed Roth IRA is funded by money on which you have already paid the taxes.
So why, you might ask, would you want to miss out on tax savings right now when retirement could be decades down the road? The answer: tax-free growth and withdrawals. Yes, tax-deferred is good, but nothing beats tax-free!
And the advantages do not end there. Your Traditional IRA will be subjected to required minimum distributions (RMD). The RMD requires that when you turn 70½, you must begin taking out a designated portion of your IRA each year. And you will start paying taxes on the money that you contributed and any earnings that accrued over the years.
There are no RMDs with a Self-Directed Roth IRA, so you may allow both your contributions and earnings to continue growing as long as you wish. Keep in mind that there are both contribution and income limits on a Self-Directed Roth IRA, unlike a Traditional IRA that has contribution limits only.
It’s always better to start early
Let’s say you are a thirty-year-old who has settled into a career and can start saving for retirement. My goodness, you are thinking, that’s all but forty years away. I have plenty of time to worry about retirement. Well, you are partially right; time is on your side but only if you use it to start accumulating wealth for the later years. Here’s how it can work:
The contribution limit for the 2018 tax year is $5,500. Let’s assume you contribute that amount to a Self-Directed Roth IRA starting at age 30 and continuing until you reach your retirement age of 68. Let’s further assume that you average 7% annually on your investments (that’s not unreasonable considering that the stock market has averaged 10% annually over the last one hundred years). You will retire with $1,049,219!
By the way, if you were to average 10% over 38 years, you would be looking at closer to $2.5 million! That’s the power of the combination of time and tax-free compounding. Of course, many of you who are reading this have passed thirty and might even be closing in on retirement or even already there. Does that mean it’s too late to build a nest egg with a Self-Directed Roth IRA?
It’s never too late to build wealth with a Self-Directed Roth IRA
With the Self-Directed Roth IRA, you can keep contributing as long as you have at least as much earned income as your contribution. And if you set up your account with a diverse portfolio that includes alternative investments, you will give yourself an opportunity at above-average growth that could be completely tax-free.
Consider the example of a 50-year-old who has accumulated $75,000 in a 401(k) with his employer. If this worker contributes 3% of his $75,000 annual salary and his employer matches it until retirement at 67 years of age, the 401(k) will have grown to $365,000. By opening a Roth and contributing the maximum each year ($7,000 since he is 50 years old), the Self-Directed Roth will have grown to $252,000 by averaging 8% annual returns. That’s over $600,000 at retirement with nearly half of it being tax-free.
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Please understand that nobody can guarantee the results of any investment. These examples show how the tax-free benefits of a Self-Directed Roth IRA, in conjunction with a diversified portfolio from a Self-Directed IRA, can help you build wealth at any age through a consistent savings schedule.
Discover the power of Self-Directed Roth IRAs with alternative assets such as real estate, private placements, private lending, tax liens, precious metals, single-member LLCs, and private stock.