If thought out properly, self directed IRA (SDIRA) investments can maximize a retirement fund, as well as provide the opportunity to become rich. This is where seeking out the best self directed IRA tips comes into play. Your retirement fund’s growth potential can become virtually unlimited when you use certain investment strategies. With this in mind, we have compiled a list of the top 5 self directed IRA tips that can help you gain financial independence and allow you to fully enjoy your retirement years.
What is a Self Directed IRA?
Before we jump into our helpful tips, we thought a self directed IRA definition was in order for those of you who are new to the game. SDIRAs, otherwise known as self directed Individual Retirement Accounts, allows for more control over a retirement fund’s buy and sell decisions. For instance, when utilizing a traditional IRA, typical investments include stocks, bonds, mutual funds, CDs, and the like. As a result, an investor’s funds may be at the mercy of the volatile stock market. In contrast, investors who self direct their IRAs may invest in alternative assets. Investors must still follow certain self directed IRA rules, but for the most part, they have more freedom to invest as they see fit.
1. Start Your Self Directed Individual Retirement Account Early
If you currently do not hold a self directed IRA, we suggest that you start investing in one as soon as possible. This self directed IRA tip is valuable when it comes to securing a comfortable nest egg that you can depend on later in life. It’s common for younger individuals that are in their 20s and 30s to not realize the importance of investing in their future. As they approach the age of retirement, they then regret not starting their retirement investment plan earlier in life. By then, unfortunately, it may be too late.
Top Advantages of Starting Your SDIRA Account Early
Compound Interest: Investing in a self directed IRA early in life will allow you to reap the full benefits of compound interest. This essentially allows you to earn interest on the interest you have already earned. To explain further, it’s when an investment earns a return, and these interest earnings are automatically reinvested, and start growing the funds on its own. This, coupled with the fact that self directed IRAs are tax-deferred, will allow your funds to grow more rapidly over time.
Tax Breaks: Starting early will allow for significant tax breaks each year that your SDIRA is in place. For instance, you can deduct your self directed IRA contributions from your taxable income. This will lessen your tax burden and therefore allow you to save a considerable amount of money over the years. If you need advice on how to lower your tax burden, Tom Wheelwright handles all our personal taxes. He is also the tax advisor to many world-renown real estate investors. Or, you can obtain expert tax advice from his book Tax-Free Wealth.
Self directed IRA tips such as this one can be simple to implement and will yield significant results. Starting early can mean the difference between working a part-time job in your retirement years, to retiring comfortably.
2. Choose a Self Directed IRA Custodian Carefully
Selecting a capable and trustworthy self directed IRA custodian is essential when it comes to properly growing your retirement funds. If you’re unfamiliar with the term, a custodian holds the self directed IRA assets, as well as buys or sells investments on behalf of the client. Experienced custodians are capable of dealing with the complexities of an SDIRA. They will be aware of wise investment choices and prohibited transactions.
Many new investors assume that a Fidelity or Vanguard self directed IRA will be the best route to take. After all, they are reputable companies. However, they do not offer truly self directed IRAs. They mostly deal in investments such as stocks, bonds, and the like. Therefore, companies such as these typically do not allow IRA investments such as real estate and other alternative assets. Get some insight as to why a majority of financial advisors don’t talk about self directed IRAs.
Specialized SDIRA Custodians
To achieve specific goals, you would need to seek out a specialized self directed Individual Retirement Account custodian. You may have run across reputable companies that offer this service, such as Pensco or Strata Trust Company. Self directed IRA custodians like these are capable of effectively investing your money into alternative assets. This is important if you have a special interest such as investing in real estate. In this case, it would be wise to find a SDIRA real estate custodian that has an extensive portfolio in this area. If you play your cards right, this is one self directed IRA tip that can make you rich, allow you to retire comfortably, and give you a peace of mind.
Tips for Finding Professional Self Directed IRA Companies that Have Custodian Services:
- Because they demonstrate different levels of expertise and services, be sure the company that holds your SDIRA is actually a custodian, and not just an administrator or facilitator.
- Ask for an overview of the latest self directed IRA tax rules, if any. This will allow you to see if they are up to date with pertinent tax laws.
- Inquire about the types of assets they hold as well as the number of clients they are currently serving. This will give you a general idea if the company is limited as to what they can handle. Or, if they offer a full scope of self directed IRA services.
- Conduct research utilizing the Better Business Bureau, as well as reviews to check their track record.
3. Diversify with Lucrative Self Directed IRA Investment Assets
Asset diversification is one of the most popular reasons many investors prefer to self direct their IRA. Being able to invest in more than just stocks, bonds, mutual funds, and CDs opens up an opportunity to use your special interests and expertise to maximize your retirement funds. In addition to this, when you utilize other investment avenues, you can protect your retirement funds from the ups and downs of the stock market
Avoid a Stock Market Downturn by Diversifying with a SDIRA
Keeping funds locked up in an account that is at the mercy of the stock market is an unpredictable investment strategy. There is a great possibility that you could lose a quarter, half, or almost all your savings if the market crashes. This has happened before, and it can happen again. You don’t have to put all your eggs in one basket. You can diversify with a self directed IRA to keep your retirement funds safe from the volatile stock market.
Allowable Self Directed IRA Alternative Investments for Diversification
Diversifying by investing in allowable alternative assets is a self directed IRA tip that can certainly make you rich. Additionally, it will allow you to deal with investments that you have knowledge of. For instance, if you’re a rental property investor, and you’re wondering, “can I buy real estate with my IRA?” The answer is yes, just as long as it’s self directed. Land purchases are also allowable if they meet certain criteria. Cryptocurrencies and other digital money, as well as precious metals such as gold, silver, and the like, are also included in the list of allowable self directed IRA investments. As you can see, this opens up a world of opportunities.
The IRS states that collectibles, life insurance, and self benefiting items such as personal property, are not allowable SDIRA investments. However, there is much that you can invest in. Here is a list of the most popular alternative investment opportunities:
- Real Estate
- Raw Land
- Oil and Gas
- Precious Metals
- Digital Currencies
- LLC Membership
- Promissory Notes
- Start-Up Businesses
- Tax Liens
4. Acquire Financially Out of Reach Assets with Co-Investing
Co-investing is one of the more creative self directed IRA tips. It allows for investing in assets that you may not have the funds to invest in yourself. This particularly comes in handy with more expensive assets such as real estate. You may co-invest your self directed Individual Retirement Account funds with another SDIRA. This can include SDIRAs that belong to your spouse, other family members, as well as yourself. Partnering IRAs can open up a variety of investment opportunities that can build great wealth.
Co-Investing with Your Family Member’s Self Directed IRAs
Although you may co-invest with your spouse and other family members, each lineal descendant is a disqualified person when it comes to buying, selling, or lending to or from them. However, you can proceed to do business and co-invest with these individuals if you’re dealing with a 3rd party. For example, a husband and wife can co-invest their self directed IRAs to pool enough funds to invest in rental property that they are purchasing from an unrelated property owner. If you are thinking of co-investing with someone to purchase a rental property, we recommend first ensuring the deal will be profitable by simply running the numbers through DealChecks property analyzing software.
Partnering with Your Own IRA
If you have multiple IRA accounts, you may co-invest with yourself. When doing so, you must avoid self-dealing situations. This is when an investor receives personal gains from their retirement fund transactions. When this occurs, the investor may receive penalties, as well as owe taxes. Self-dealing examples include personally residing in a house that you bought with your self directed IRA, buying digital currencies from yourself, taking out a salary from your SDIRA, and so on. If you would like to co-invest with yourself, speak with your custodian to obtain a list of self-dealings to avoid.
Co-Invest Through a Limited Liability Company (LLC)
Sometimes co-investing through an LLC just makes sense. Investing through an LLC means that the IRA owns the LLC, and the LLC would then have ownership of the investment. This is especially beneficial when using your self directed IRA to invest in rental properties. When utilizing an LLC, the tenant pays their rent in one payment to the LLC. In contrast, if the LLC did not exist, the tenants would need to pay each co-investor’s IRA separately. In this case, forming an LLC is a much more efficient way of doing business. When forming an LLC, it’s best to seek the advice of someone who has experience setting up corporate structures. We recommend contacting Corporate Direct.
5. Consider a Backdoor Roth IRA Contribution
Before we dive into backdoor Roth IRA contributions, let’s start with the basics of what a self directed Roth IRA entails. In general, it’s a retirement account that differs from a conventional IRA in that you can’t write off or take advantage of tax deductions from your contributions. At the same time, your earnings are tax-free with a self directed Roth IRA, even when you withdraw them during your retirement years. This is an exceptionally smart investment strategy because tax rates may go up by the time you retire. The bottom line is that a self directed Roth IRA allows you to withdraw your savings without owing taxes.
What is a Backdoor Roth IRA Contribution?
Although a self directed Roth IRA sounds like a perfect investment strategy, there is a significant issue. The IRS has set certain restrictions on who can contribute to a Roth IRA. Plus, they have also set limits on how much money you may add to your account. For 2019, single individuals with an adjusted gross income of $137,000 or higher, as well as individuals who are married filing jointly with an income of $203,000, may not open a Roth IRA. Additionally, those who are allowed, can only contribute $6,000 per year or $7,000 if over age 50.
To get around these restrictions, the backdoor Roth IRA comes into play. It’s a solution or legal way for higher-income earners to open and contribute to a Roth IRA. It also allows for surpassing the contribution limits. The basics of how to set up a self directed Roth IRA entails placing money in a traditional IRA or SDIRA. The account is then rolled over into a self directed Roth IRA. You will have to pay taxes after you convert to a Roth account, but it’s a one time deal. In sum, this is one of the clever, but legal, self directed IRA tips that will help you bypass the rules, and step in through the backdoor. If you convert from certain IRAs to a Roth IRA, you will be expected to report it to the IRS using this backdoor Roth IRA form 8606.
Additional Resources for Investors
- See why investing in real estate vs stocks can help you protect your funds.
- If you need extra money to invest, Fund&Grow may be able to help.
- Learn how to easily buy a rental property by the end of the year.
- If you have a rental property, you may want to use NREIG Insurance Services.
- Read this post if you’re a foreign investor interested in buying U.S. real estate.
- Take a look at the best real estate podcasts out there.
- Find out how to recession-proof your investments.
- If you’re investing in new construction, utilize a cost segregation study.
- See why a 401K is a lousy way to build wealth.
- Find out what the average 401k balance by age is.
Utilize These Self Directed IRA Tips to Become Rich and Enjoy Your Retirement!
Whether you decide to co-invest, diversify your portfolio, or possibly rollover to a Roth IRA, you are on the right path to securing your future. Furthermore, with some additional financial planning tips from your self directed IRA custodian, you will be making wise investments that can have a significant impact on your retirement funds. For those who are seeking out self directed IRA tips that will make you rich, or tips to fine-tune your investment strategies, we hope this article has been helpful. If this information has sparked your interest in SDIRAs even further, check out our Self Directed IRA Investing Series.
If you’re a real estate investor who’s interested in utilizing your self-directed IRA to invest in rental properties, contact Morris Invest to schedule a free consultation. Our team of experts can provide you with real estate from one of our outstanding rental markets. We also renovate, fill rental properties with tenants, and manage.
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