When you think about a Self-Directed IRA, be honest: you think about an arrangement that only the rich can afford. You may look at your own account and think “I can’t invest in real estate—I don’t have enough money.” Or you may be faced with the reality that you cannot put enough money away within your current budget to stack up a meaningful retirement nest egg. And earlier this year, the S&P 500 Index was setting new records for just how expensive it was relatively to the average hourly rate for a worker.
At the time of that story, the S&P Index meant that workers would have to work 114 hours to equal the price of the S&P in their hourly wages, a record. And while COVID-19 has thrown investors for a loop, one question still remains: how can investors maximize their retirement money, even if they don’t have the kind of hourly wages one might associate with retirement investing? A Self-Directed IRA can help investors maximize their dollar—here is how:
Using Before-Tax Contributions to Save Money Now
Perhaps the most powerful benefit of retirement investing is that you can use before-tax contributions to immediately save money on your tax return. Doing so will lower the taxable burden of your return, which in turn lets you put “before tax” money into a retirement account. This isn’t a way of cheating the system, as you’ll eventually pay taxes on that money when you pull the money out of the retirement account, but it is a way to defer the pain of paying taxes. That, in turn, gives you more flexibility in times of crisis.
Which account makes sense for this? Most retirement accounts work on a pre-tax basis, except for accounts like the Roth IRA. For example, a Solo 401(k) plan will allow you to make these kinds of contributions. This is also a retirement plan that you can take with you no matter where you work—even if you are self-employed.
Using Debt in Retirement Assets like Real Estate
Perhaps the most powerful way to maximize the investment possibilities in your account is to use non-recourse loans. Non-recourse loans are those loans in which the lender will not be able to go after your personal holdings in the event of a default. This essentially keeps the IRA separate from the rest of your personal holdings.
Investing in real estate can be high-risk, but in many cases, it is not as fraught with risk as some investors might imagine. Generating a consistent cash flow every month from rental income, for example, means that there can be more reliability in your portfolio. Rather than wondering if the price of the stock market is going to go up, you can diversify out of the stock market and keep some of your holdings in real estate that continues to generate income.
Of course, real estate is an investment like any other investment—there are good investments and bad investments. But using real estate within a Self-Directed IRA comes with the added benefit of tax protection, which means that investors have a larger margin of error. It is hard to find that expanded margin of error in any investing scenario except retirement accounts. And using a Self-Directed IRA means you have easy access to the same protections anyone else with an IRA has.