You do not need a Self-Directed IRA to earn profits. In fact, one of Warren Buffett’s first investments, according to Entrepreneur, was not an expertly-placed pick in the stock market. It was a used pinball machine. Buffett and a friend installed the machine in a barbershop and it was popular enough to earn them a profit.
But rather than take those profits and spend them on candy, the young Buffett and his friend decided to do something radical: they reinvested those profits. Soon, they had more pinball machines—and more capital.
Maybe you do not need a Self-Directed IRA to earn profits, but as it turns out, it’s the ideal vehicle for profit reinvesting. If you want to create a retirement nest egg in a hurry, having your money make more money is the best approach:
Why Should You Reinvest Profits?
First things first: why bother? As it turns out, there’s more than one reason:
- In an IRA, those profits grow tax-free. There’s no reason to take profits out of an IRA and incur taxes and penalties on them when you can put 100% of those profits to work by keeping them within the account. Delayed gratification, when applied to retirement, works wonders.
- Get compounding returns working on your side. In investing, compounding is one of the most powerful ways to build wealth. If you invest early, the returns from those investments feed into more investments—creating a self-fueling feedback loop that continually generates more money without as much effort.
Reinvesting profit also helps you pay off debts and create a more secure overall retirement portfolio. And within a Self-Directed IRA, the simple act of reinvesting profits rather than withdrawing on the account early will ensure that you put more of your money to work. Taking money out of these accounts before the age of 59 ½ can incur penalties, subtracting from your total net worth.
How to Reinvest Profits within a Self-Directed IRA with Non-Traditional Assets
In a typical IRA, you will own stocks or mutual funds. In this case, setting up automatic reinvesting is easy; you may even find that a broker provides a button you can click for automatic reinvesting.
But what if you own something within your IRA that’s a little less traditional, such as real estate?
When you have profits from real estate within your Self-Directed IRA, you can invest in a number of expenses that you might need to take care of anyway:
- Upgrades and improvements to the property.
- Any repairs that might be needed.
- Putting money back towards city/property taxes.
- Landscaping improvements, especially when looking for renters.
- Putting money back towards loan payments (in a Self-Directed IRA, you can use non-recourse loans to fund real estate purchases).
- Handiwork around the property.
- Putting money towards the property management expenses.
The more cash flow that an income-earning property generates, the more you will be able to sink back into the property. This money can also be used towards the purchase of new properties—similar to the way Warren Buffett expanded one of his earliest businesses.
You can also move money across asset classes to reinvest your profits. For example, an IRA LLC arrangement makes it easy to invest in multiple asset classes. The profits that come from one asset class could then be pointed to another asset class.
If you are interested in learning more about how Self-Directed IRAs can be used for easy profit reinvesting, contact American IRA, LLC at 866-7500-IRA. You can even download a free eBook guide to help familiarize yourself with Self-Directed IRAs and all of the profit-reinvesting potential of growing your nest egg with self-direction.