Did you know that a small simple Roth IRA can turn out to become the most valuable account worth over millions of dollars? This happens to people often.
A report that was published in 2011 by the US Government Accountability Office stated that about 791 people have IRA accounts with balances under $25 million dollars, they go on to mention that there were about 314 people with IRA accounts worth over $25 million.
A secret to becoming wealthy
There is really no secret, the wealthy just instill solid financial concepts and teach them to their family generations. A self-directed IRA can exponentially build a multi-million dollar retirement fund.
The wealthy are wise enough to start these accounts early, they know that using self-directed plans to invest for retirement is one of the best ways you can leverage your money.
What's a self-directed IRA?
There are so many products out there and they don't make it easy to approach this area it could be intimidating to even discuss this amongst your community, friends, or family. Don't let this scare you, here is some information to help you become familiar with these types of accounts.
A self-directed IRA is a portfolio that you control and is self-directed. You choose the trustee who will hold your account, you choose your investments. This can be assisted with a trusted financial advisor. Look for an advisor who holds fiduciary duties as their top priority. There are typically two types of IRA's that are available: Traditional IRA and Roth IRA's.
Disadvantages of a Traditional & Roth IRA is the very low contribution limits of $5,500 per year. If you are self-employed there are IRA's out there you can take advantage of. There are two that come to mind: SEP IRA and a solo 401(k). Both SEP IRA's and solo 401l(k) allow you to contribute up to $55,000 for the current 2018 year.
There is no secret to building wealth, the wealthy know and educate themselves and take advantage of these resources to build up a good retirement plan.
Okay I've heard of these types of IRA's how do I set one up?
When you work with an employer and have a retirement plan with the employer you work for you only have access to specific accounts that are provided to you to invest in. When you set up a retirement plan outside your work 401(k)'s you will find access to a larger and broader type of investments.
So I have set up my IRA how do I grow it to a multi-million dollar retirement account?
Like everyone else you need to start self-funding your account, to do this you will need to contribute directly to your account. Plan on taking your distributions when you reach age 59 1/2 years old. If you take distributions out before you turn 59 1/2 you will have to pay income tax, including a 10% penalty.
If you're considering in different alternative investments you might have to set up those accounts with more than one trustee. Different trustees specialize in specific industries, so it's good to shop around and explore different trustee's.
Okay I'm ready to invest, what can I invest in?
Well listing the possibilities of what you can invest in would be a long list, I'll just tell you what you can't invest in. The IRS states that the following items aren't allowed to be invested in artwork, gems, stamps, antiques, and some other items.
Some people don't realize you can invest in the following items for a self-directed IRA: real estate, farmland, water rights, cryptoCurrencies, gold, livestock, and some other elements that are possible.
I've come across a popular investment that the wealthy choose is usually private company stocks. These stocks purchased in a plan have relatively little value, but once a company decides to go public these types of stocks explode and as a result, a self-directed IRA blows up to exponential proportions. You cannot find these types of investments in your typical IRA accounts.
Okay I know what a self-directed IRA is, where can I open an account?
You will have to do some research to find someone that specializes in these types of particular assets you want to invest in. A good place to start is in your local area, there are also large firms that offer and specialize in specific investments for example maybe one firm specializes in precious metals, while another firm specializes in real estate. If you live in the greater Austin area I can help educate and guide you through this process. It does not take much time to set up, I set up a few of these types of investments for my family and only took about 15 minutes to get 2 open.
Proceed with caution regarding these types of investments
Self-directed plans have a lot of elements that need to take into consideration making them a little bit complicated, here are a couple of things that you need to be cautious of regarding these types of plans:
The cost of owning a self-directed plan
- Fees are usually affiliated with these types of accounts, but consider them low fees for the number of returns and investment you will be receiving when you take your distributions.
- The commissions you will have to pay sometimes feel steep, but just consider the R.O.I in that current year, you could expect to see results anywhere between 7-18% but these are never guaranteed.
- The fees you pay in the current year can feel they are a premium, for example, given 1 year you might pay a small fee to generate 25% R.O.I. in that year, just consider that your fees may be high as a result your returns should have a direct correlation.
The Trustee Dilemma
- There are large trustee firms out there, they may consider your investment or network to have to be a certain amount to participate in their plans
- Consider the small trustee firms out there who do not have that large public reputation as they could work just as hard for you.
- Before you jump into a firm please do your research, look into their reports, there are other ways you can investigate them by Googling information about them, reviews, BBB, and other online resources to help you make your decisions.
IRS responsibilities
- Your self-directed IRA's do not require any special forms with the IRS
- There is a Form 5305-SEP that needs to be completed, I recommend you save this file.
- Once you reach a $250,000 amount you will be required to file a Form 5500 with the IRS
- There could be other costs associated with your plan that you might have to consider as well.
Distributions
- There is a required minimum distribution for these types of plans excluding the Roth IRA.
- You must take your distributions before the age of 7 1/2
- Consider your taxes as they may take on a substantial liability.
When owning self-directed plans, things you need to know
- When you own one of these types of plans you cannot be involved in buying, managing or selling real estate in an IRA.
- If you participate in bullion, you cannot take any physical possession of precious metals.
- If you make any transactions that are not authorized, the IRS can decide to immediately subject you to penalties and taxes.
- To purchase assets your funds must be paid out of an IRA, they cannot come from personal sources.
With all the terms and conditions of owning a self-directed IRA the benefits outweigh all the cautionary measures of having one.
The challenge is to find the right trustee, the homework you have to do, spend the time and do your research and educate your self as much as possible. Bottom line the wealthy know how to tax shelter their investment plans, just learn and follow them. Its okay to copy someone's actions that are the best way to learn, create, and build wealth.
If you live in the greater Austin area I would be honored to help you and your family on this path. It is my duty to work for you and keep your best interest at heart. I am passionate about finances. Educating and helping others is my gratification knowing my services help make a difference in families lives.
Rene Gonzales
Senior Representative
c. 512-568-7203
e. Rene.Gonzales@Primerica.com
www.Primerica.com/ReneGonzales