Self-Investment IRA: The Tax-Free Way to Maximize Your Investment Earnings
Have you ever imagined that it was possible to double or even triple your current investment earnings without paying Uncle Sam a dime in taxes? He believes it or not, it’s possible…with a self-invested IRA or 401(k). These two retirement savings accounts allow you to build wealth while saving on taxes. A self-directed IRA or 401(k) are savings plans that give you the power to invest your contributions. With this kind of control, you can invest and reinvest multiple times, maximizing your profits.
One of the most popular investments people make with their self-managed savings accounts is real estate. Now, this doesn’t mean you can buy yourself a new home or get a better rate on your current mortgage, but investing 401(k) money in real estate, or IRA money, is a way to buy and sell property for a profit. . A self-investment IRA keeps your money actively working for you, instead of passively sitting in the bank and earning a minimal return.
When you set up a self-investment IRA, you’ll have to make a decision about how you’re going to take the tax benefit provided by the government. It all comes down to a “pay now” or “pay later” situation.
If you want to “pay now,” you can set up a self-directed Roth IRA, which is funded with money from income that’s already been taxed. Any earnings you earn from your investments will remain tax free. For example, if you decide to invest in real estate, you can continue to invest and reinvest your earnings multiple times, and any earnings remain tax-free. Even when you withdraw your money at retirement, you won’t owe any taxes on your earnings. Your “already taxed” contributions can also be withdrawn tax-free.
If you want to “pay later,” you’d set up a traditional self-investment IRA, which is funded with money you deduct from your taxable income for that year. Any earnings you earn from your investments will remain tax-deferred until you withdraw them at retirement. At that time, the corresponding taxes would be owed. Just like with a self-managed Roth IRA, you are in control to maximize your earnings by investing in a profitable vehicle like real estate.
Investing 401(k) money in real estate is no different than an IRA. The difference comes in the maximum amount the government allows you to deposit into each of these accounts. A self-investment IRA is limited to a maximum contribution of $5,000 for 2008. The maximum contribution allowed for a self-directed 401(k) is $15,500 for 2008. The decision to “pay now” or “pay later” must also be made by establishing a self-directed 401(k).
You will find that most financial institutions will discourage you from establishing a self-investment IRA or 401(k). This is because they don’t want to lose the fees and profits they make from selling and managing their inside investments.
If you want to set up one of these self-managed accounts, you’ll need to find a company that specializes in managing these types of plans. These companies are there to take your investment orders and manage the hassle of paperwork and regulatory compliance.
Make no mistake about it. Owning a self-investment IRA will mean taking an active role in determining your financial destiny. These savings accounts are not for people who don’t mind the “troubles” and “uncertainty” of making investment decisions. But if you really want to take advantage of the fantastic opportunity to maximize your earnings and save on taxes, then a self-invested IRA or 401(k) is the way to go.