Last Updated on February 7, 2020
The primary advantage of the Self-Directed Roth IRA LLC to make investments is that all income and gains associated with the Roth IRA investment grow tax-free. Furthermore, this will not be subject to tax upon withdrawal or distribution. This is because unlike traditional IRAs, you are generally not subject to any tax upon taking Roth IRA distributions when you turn 59 1/2.
In general, the longer the time period, you receive more advantages with the Roth IRA. This is all thanks to the benefits of compounding.
One of the most important motivations that impact the scale of your retirement is the length of time you let your savings grow. The reason for this is, the effects of compounding can become a very powerful tool. Unlike a Traditional IRA, income and gains from a Self-Directed Roth IRA grow tax-free.
In contrast, income and gains by a traditional Self-Directed IRA are only deferred. Taxes must be paid upon distribution, which are vulnerable to future increases in tax rates.
You can best view the power of tax-free compounding by way of this example.
Joe Starts a Self-Directed Roth IRA
Assume Joe, who is 30 years old, decides to start a Self-Directed Roth IRA. Joe had a current Roth IRA balance of zero at that time. Assume Joe decides to make annual Roth IRA contributions of just $3500 each year until he reaches the retirement age of 70.
Further assume that Joe is able to generate an average annualized rate of return of 9%. And the prevailing tax rate is 25%. At age 70, with a Roth IRA, Joe will have $1,289.022 tax-free in his Self-Directed Roth IRA. In contrast, if he invested, say, a 25% tax rate outside of a retirement account, Joe would have only $699,475. Hence, the Self-Directed Roth IRA allows the individual to accumulate an additional $589,547 of wealth.
Given that Americans love to spend and hate to save, Americans have one of the lowest savings rates of any developed country. Americans are the ultimate consumers and that definitely plays a role. Most people don’t understand the basic concepts of retirement planning and how crucial it is. Of course, this is partially due to the fact that they’re not widely taught in high schools or even colleges and universities.
For example, if young workers are shown that if they began funding a self-directed Roth IRA with $3,000 per year at age 20 and continue on through age 65, they will wind up with $2.5 million at retirement. Of course, this is assuming they earn the long-run annual compound growth rate in stocks. This was 9.88 percent from 1926 to 2011. Not a bad result for investing only $3,000 a year.
Saving just $10 a day can make you a millionaire when you retire. Experience the Self-Directed Roth IRA LLC Advantage today. Call IRA Financial Group and we’ll help set you on your way.