A simple understanding of how they work.

Most people in America don’t have enough money for retirement. That’s a fact. Many people have retirement accounts, but they are lax with their own personal oversight of their investments.

Self-directed retirement accounts allow you to invest in real estate and real estate related products, like mortgages and options. The self-directed accounts allow you more choices with more oversight on your part. I mean, really: to stick your money in stocks and mutual funds to be is a gamble. Investing in what you know is more important than to hand over your money to a stockbroker who might not even have his own money invested in what he is selling to you.

I like control and I like real estate. However, it’s not always easy to find real estate related products that will provide safety for your retirement. First, I will address the best accounts to use, and then how to find opportunities.

Roth vs. Traditional IRAs

In the U.S., we have Roth IRAs (Individual Retirement Accounts) as well as Traditional IRAs. We also have the ability to have a 401k that can be a Roth or a Traditional account. In each case, the main differences between Roth and Traditional are as follows:

  1. Traditional Retirement Accounts: You get a deduction for your contribution, which will reduce your taxable income by the amount of your contribution. You must start taking distributions at age 70.5, and all distributions get added to your adjusted gross income at that time.
  1. Roth Retirement Accounts are different. There is no deduction at the time of your contribution. You can start taking out distributions tax-free at age 59.5 as long as you have owned the account for five years. The big difference between a Roth and a Traditional account is while they both allow you to compound profits tax-free, only a Roth Retirement Account is tax-free upon distribution, and there is no forced distribution at age 70.5.

Clearly, it is in most people’s’ best interest to go the Roth route over the Traditional route because no one knows what income taxes will look like at the age of retirement. If you suck it up and don’t go the Traditional route by not taking the deduction, you could be in a much better situation at retirement with a Roth due to the lack of taxation upon distribution.

However, there are more things to think about besides whether you create a Roth or Traditional Retirement Account. And by the way, you could have both.

The Traditional and Roth IRAs strictly limit the amount of your contribution. For anyone under 50 years old, the current limit if $5,000. The limit is $6,000 if you are over the age of 50.

If you have a business, you can set up a solo 401K, which can have far more protection and allows you to act with a little more freedom.

Keep in mind, you can never combine funds, and all the self-dealing and prohibition transactions rules are still in place.

Investment Opportunities

Look at the chart below and determine what is best for you:

Individual Retirement Account (IRA) Solo 401K
Contributions: Limited to $5,000 per year.  (50+ years old has $6,000 limit) Approximately 25% of your income can be contributed
Draconian Rules: make one mistake and the IRS can forcibly distribute your IRA If you make a mistake, only the mistake gets distributed
Financial purchases are subject to income tax to the extent they are financed No financial debt issues except they must be non-recourse
You cannot borrow money from your IRA You can personally borrow up to $50,000 from your 401K
Required to take distributions at 70.5 years of age Don’t have to take distributions, but you’re allowed to tax-free at age 59.5 if you’ve owned the account for 5+ years
Has some lawsuit protection Has much more lawsuit protection as there are statutes in place

The bottom line is that if you have a business, you may be better off to set up a solo 401K for all the reasons listed above. Look, I’m not an attorney or CPA. I have done all the things I have written about and please…be encouraged to take action for you and your family to have the lifestyle you so desire in your retired years.

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  • R J Palano

    RJ Palano is the acquisition director of BuyCashFlowProperties.com, a Tampa, Florida-based company that primarily provides turnkey houses for investors in the metropolitan Atlanta and Tampa Bay areas. His property management experience spans more than 35 years, and he has been involved in more than 3,000 real estate transactions in 12 states and more than 50 cities. Contact him at 813-495-3006 or rjp@buycashflowproperties.com.

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