An IRA stands for Individual Retirement Account. It is a retirement that is owned and controlled by an individual. Currently, self-directed IRA accounts make up less than 2% of the $4.2 trillion IRA market. However, they continue to increase in popularity as time goes on. For individuals with an eye open toward the future, there are several advantages of opening a Self-Directed IRA account. Here is a list of four of those advantages.
#1. Medical Expenses
One of the benefits to having an IRA account is the ability to take a loan out when an unexpected situation arises. For example, if you incur a significant medical expense that totals more than 7/5% of your adjusted gross income, an IRA loan will be able to help you pay medical expenses that you are not reimbursed for. The adjusted gross income is found by subtracting adjustments to income–such as student loan interest or IRA contributions–from your earned income. Because the loan is used for medical expenses, you can avoid the tax penalties for making a withdrawal.
#2. Tax Savings
One of the main advantages of self-directed IRA accounts is that all contributions are tax-deductible. For the amount of money you put into your account, your tax liability will decrease by your tax bracket percentage. Significant tax benefits can occur when individuals invest in middle-market leveraged-loan funds or other high-yielding alternatives. These investments can result in returns of 10% or greater.
#3. IRA Real Estate Loans
Many people use their self-directed IRA account to obtain real estate loans. Finding a non-recourse lender for a real estate loan using your IRA account ensures that even if that individual is unable to pay back a non recourse real estate loan, the lender can only go after assets that were used as collateral–in this case the IRA account itself. In a recourse mortgage, if the loan is not paid back, other assets will be used as types of collateral so your house could be seized. By making a down payment between 30% and 40%, IRA borrowers can obtain loans from non-recourse lenders to purchase real estate including single-family homes, townhouses, condos, apartment buildings and commercial properties. The only caveat is the real estate purchased must yield a positive cash flow gained from rental income.
#4. Compounded Interest
What makes a retirement account so valuable is not necessarily the money you are putting in–but the money you earn from compounded interest over time. The earlier you establish an IRA account, the more interest you will be earning which translates to more money for when you retire. Having a self-directed IRA gives the owner control of all financial decisions regarding the account. This allows him or her to have more flexibility when choosing investment options such as taking a loan from a non-recourse lender.
Saving for retirement is something that should be on your mind several decades before you plan on retiring. Time is what allows your savings to really add up. If you plan on investing in the future into real estate, partnerships or the gold market, having a self-directed IRA will allow you the freedom to make those decisions.