Not everyone thinks of debt as a wealth-building tool—but for those who do, especially in the field of real estate, there are plenty of opportunities. One of the most pressing questions for people who own Self-Directed IRAs is simple: should investors pay off mortgages first, or pay off long-term debt? To add context to this question, we’ll look at aspects of both questions and answer how it might be possible to make a profit on long-term debt within a Self-Directed IRA.
Mortgages vs. Long-Term Debt: Aren’t They the Same Thing?
First, the differences between the two. Mortgages are a form of long-term debt—and one in which the investor might make a profit. For instance, if you were to buy a piece of real estate within a Self-Directed IRA (which gives you the advantages of tax protections under a retirement account), you’ll find it easier to turn a profit on that piece of property simply because there are fewer costs that go into it, thanks to the retirement account’s protections. If you sell the piece of property for more than you ever paid on the mortgage, you can collect a profit with that piece of real estate, storing that profit within a Self-Directed IRA to enjoy those same tax protections. That’s the advantage of the Self-Directed IRA.
The term “long-term debt,” however, applies to more than just mortgages. Long-term debt can also mean issuing personal loans, such as issuing a mortgage loan yourself to someone else, who serves as the borrower. This can happen within a Self-Directed IRA as well.
For instance, a Self-Directed IRA holder may issue a private loan within the Self-Directed IRA. That individual can then pay back the loan over a long-term period, creating a profit of paying interest over the terms of the loan. When the loan is finally paid back in full, the investor may be able to look back at that long-term debt and see that the interest rate returns offered a tidy profit on the interaction overall.
Using a Self-Directed IRA in Creative Ways
The beauty of a Self-Directed IRA is that it offers a tremendous amount of flexibility. The traditional investments for IRAs are stocks and bonds, but investors can also use Self-Directed IRAs to invest in real estate, precious metals, private loans/notes, and more. This offers several advantages over many traditional approaches to investing, including:
- Tax-deferred growth: The growth in an IRA is not subject to taxes until the money is withdrawn from the account. This allows investors to accumulate their funds without having to pay tax on them until reaching retirement age or taking money out of the account.
- Flexibility: Investors can choose the types of investments that best suit their needs when setting up an IRA with a financial services company. This means that they don’t have to stick with just one type of investment because they can diversify their portfolio by investing in different types of assets such as real estate or precious metals like gold coins or silver bullion bars.
Should investors focus on mortgages or long-term debt when utilizing the creative side of Self-Directed IRAs? That’s a recommendation that only the investor can decide for themselves. American IRA does not make specific investment decisions, but instead serves as a Self-Directed IRA custodian, executing buy/sell orders on your behalf. But that’s only the case if you sign up with us!