The Self-Directed IRA has become the fastest-growing retirement product for individual investors. Over the last several years, millions of Americans have turned to the Self-Directed IRA as a key vehicle to generate investment diversification, retirement savings, and tax-free gains.
This article will explore the three main reasons why millions of Americans have started Self-Directed IRAs: (i) investment diversification, (ii) retirement savings, and (iii) tax-free income and gains.
What is a Self-Directed IRA?
A Self-Directed IRA is not a legal term that you will find in the Internal Revenue Code. A Self-Directed IRA is essentially an IRA that allows for alternative asset investments, such as real estate. Traditional financial institutions do not allow IRAs to invest in IRS-approved alternative assets, such as real estate, because their focus is on earning fees through traditional investments. Hence, the birth of the Self-Directed IRA industry.
3 Reasons to Open a Self-Directed IRA
Alternative investments such as real estate have always been permitted in IRAs; it even says so right on the IRS website. But few people knew about this option in the past. Instead, Self-DIrected IRAs and the ability to invest in alternative investments in an IRA have become increasingly common.
1. Diversification
Whether it is through a Self-Directed IRA or personal savings, many of us have most of our savings connected in some way to the stock market. In fact, over 90% of retirement assets are invested in the financial equity markets. Investing in non-traditional assets, such as real estate offers a form of investment diversification from the equity markets. In general, the more diversified your portfolio, the greater the chance that your assets will offer lower correlation, meaning they are less likely to move in the same direction.
2. Retirement Savings
The primary advantage of using a Self-Directed IRA to invest is based on the concept of tax deferral. The U.S. retirement system is based on the power of tax deferral. Tax deferral is when all gains generated by a pre-tax retirement account investment flow back into the retirement account tax-free. This allows your retirement funds to grow at a much faster pace than if the funds were held personally, allowing you to build for your retirement more quickly. This is also known as compounding interest, which Albert Einstein coined the 8th wonder of the world.
The concept of tax deferral can be best understood by way of a set of examples:
| IRA Value by Age | Annual Contributions | Retirement Age | Rate of Return | Tax Rate |
| Value at age 70 $193,210 | $365 per year from 22-70 | 70 | 8% | 25% |
| Value at age 70: $579,630 | $1095 from 22-70 | 70 | 8% | 25% |
| Value at age 70 | $1825 from 22-70 | 70 | $966,050 | 25% |
3. Tax-Free Income & Gains
Using an IRA or 401(k) plan to invest in real estate can provide the retirement account holder to generate tax-deferred or tax-free income or gains, in the case of a Roth IRA or Roth 401(k). In general, all income from the sale of real estate or rental income would flow back to the retirement account without tax. For example, if you used a Self-Directed IRA to buy a piece of land for $100,000 and later sold the land for $200,000, the $200,000 would flow back to the IRA without tax. Similarly, if your Self-Directed IRA is invested in a rental real estate property, rent from the real estate would also flow back to the IRA without tax.
The concept of tax deferral using a pre-tax Self-Directed IRA is taken to the next level with the Roth IRA. In the case of a pre-tax Self-Directed IRA, distributions from a pre-tax IRA are subject to income tax after the age of 591/2, plus an additional 10% early distribution penalty if a distribution is taken from a pre-tax Self-Directed IRA before the age of 591/2. Whereas, in the case of a Self-Directed Roth IRA, so long as the Roth IRA has been opened at least 5 years and the Roth IRA owner is over the age of 591/2, all Self-Directed Roth IRA distributions would be tax-free. It is for this reason that the Self-Directed Roth IRA has become recognized as the best legal tax shelter in the Internal Revenue Code and one of the key reasons why so many retirement investors have been turning to the Self-Directed IRA and Roth IRA as an investment and retirement vehicle.
Why Use IRA Financial to Establish a Self-Directed IRA
IRA Financial “literally” wrote the book on the Self-Directed IRA. Our founder, Adam Bergman, Esq, has written 8 books on Self-Directed retirement plans and over the last 15+ years has helped over 24,000 Self-Directed clients invest over $3.2 billion in alternative assets.
IRA Financial Self-Directed IRA is specifically designed and customized for each type of investment. Whether it is real estate, private equity, venture capital, hedge fund, private business, cryptos, precious metals, hard money loans, or much more, our Self-Directed tax experts will work with you to design the perfect Self-Directed IRA solution for your investment. Additionally, IRA Financial is the only Self-Directed retirement company that provides annual consulting, IRS tax reporting/filings, BOI FinCEN reporting, and IRS audit guarantee.
See for yourself why IRA Financial is one of the leading providers of Self-Directed IRAs in the country:
- Customized Self-Directed IRA design for your investment
- Flat annual fees
- No transaction or asset value fees
- No wire of check fees
- IRA & 401(k) personalized rollover support
- IRS tax reporting, including IRS Form 5498 & 1099-R
- BOI Reporting with FinCEN
- LLC IRS tax filing (Form 1065) and UBIT tax filings (Form 990-T)
- Free Self-Directed Roth IRA conversion
- Free RMD support
- Free tax research on Self-Directed IRA topics
One-on-one tax support on the “disqualified person” and “prohibited transaction rules.”
- One-on-one tax consultation on UBTI and UDFI rules
- Free access to our best-selling Self-Directed IRA books
- Free access to our educational webinars, podcasts, and newsletters
- Self-Directed IRA IRS audit guaranty
- Free HSA & Coverdell account for year 1 (value of $920)
Open a Self-Directed IRA
Conclusion
The Self-Directed account has become an increasingly important vehicle for retirement account investors looking to gain more investment freedom, diversification, and tax optimization. Starting a Self-Directed IRA could end up becoming the most financially rewarding decision of your lifetime.
