Active investors from any generation are more likely to avoid tax problems by choosing a self-directed IRA with checkbook control. According to researchers, millennials in their 20s and 30s described as active investors are likely to withdrawal from their IRAs. Taking early withdrawals from retirement accounts often means a 10 percent tax penalty. In contrast, baby boomers in retirement or nearing retirement are more likely to hold investments for a year or longer. The buy-and-hold approach does not always work with stocks, but it is a sound strategy for people who hold real estate. Even if you like to trade stocks as an active investor, it pays to consider a self-directed IRA with checkbook control for greater flexibility and freedom.
Understanding the rules
Active investors thrive with maximum choices. With a self-directed IRA, you still get the benefits of any retirement account. Money grows tax deferred. Unlike with other retirement accounts, you can buy alternative investments including real estate or rental properties. Other options include tax liens, notes as well as the more traditional bonds, stocks and CDs. The main thing to avoid with a self-directed IRA is what the IRS calls “self dealing.” You can’t choose investments or real estate properties related to disqualified individuals. In other words, if you invest in a rental property using your self-directed IRA, you can’t lease it out to a spouse, parent, grandparent, children or grandchildren.
Harnessing the power
As an active investor, you likely research different stocks. Some of the advantages of a self-directed IRA is the power to truly diversify and grab hold of your financial future. True diversification is not holding 10 different stocks in your portfolio. With a self-directed IRA you can own mortgage notes, precious metals and real estate. Because of the tax advantages, you are more likely to build lasting wealth. In the past five years, the real estate market has recovered. In many parts of the country home values are higher than during the housing boom. Rental properties are especially lucrative providing stellar ROI (return on investment). People who have the checkbook control attached to their IRA are able to bid and buy foreclosures and bank-owned properties. With checkbook control, you can beat out other bidders.
Passing on the wealth
While you know a lot about investments, your children or grandchildren do not necessarily share your knowledge or understanding. With a self-directed IRA, you can pass on wealth to your children with fewer tax implications.
Choosing a Roth or a traditional
For the past few decades, most active investors have qualified to contribute to a Roth IRA which is funded with post-tax dollars. With a self-directed IRA, you can also fund the account as a Roth account. If you expect to have substantial gains on an investment property you buy with a self-directed IRA, consider using a Roth. All of the gains or earnings grows tax-free. Moreover you won’t have to pay taxes when you take the money out at retirement age. For young investors tempted to take early withdrawals from a retirement account, the Roth is also advantageous. You can take out the money you put in without paying taxes.
Even if you are not an active investor who trades stocks on a regular basis or makes your own investment decisions, a self-directed IRA can help you build wealth. Some investors open a self-directed IRA so they can buy real estate with their retirement funds. In those cases, real estate investments provide stability and financial security.
At New Standard IRA, we work with clients from every generation interested in gaining checkbook control over their self-directed IRA. For more information on opening a self-directed IRA with checkbook control, please contact us.