Should I stop investing in an IRA?

Question

Am I throwing money down the drain by putting it in an IRA?

I'm looking at 30yrs before retirement; assuming a 5% yearly stock market appreciation I'd have to put about $2,440 dollars into an IRA every single month for 30 years to hit 2 million dollars.

I've done a few flips and have 2 rentals at the moment. I just used the BP rental calculators and the numbers really came to light. Just one rental property of mine (cash flowing and current sale value=$620,000) will likely be worth over 2million in 30yrs (assuming a 3% yearly increase in home value / maintenance / rent) while handing me over a thousand dollars in cash each and every month.

Is this something that you all know and I'm just beginning to wrap my head around? Why the heck would I keep funding my IRA?

Dmitriy Fomichenko · Answer

@Christian Wathne Your scenarios are based on the assumption that the IRA will invest only in the stock market. So it is not really a fair comparison (invest in IRA vs without an IRA). It's actually more like comparing stock investments to real estate.If you compare real estate investing in an IRA and outside of an IRA, the benefit will be more recognizable. You can have tax-deferred benefits with an IRA and tax-free earnings with a Roth IRA. This is why many investors, including many BP members, have utilized the self-directed IRA options to invest in real estate. There are certain drawbacks, such as you cannot take the money out until retirement, and that you cannot live in or otherwise personally benefit from the property while it's owned by the IRA (ie. rent out to yourself or your spouse, use as a vacation home, etc.) But then ultimately, the goal is to invest for your retirement, and an IRA can be a fitting vehicle for that.

Brian Eastman · Answer

@Christian WathneThe problem is not the IRA. The problem is what the IRA is invested in.The tax sheltering provided by an IRA allows you to accrue more capital over time, since taxes are not reducing the principal along the way. An IRA is a great long term wealth building tool. The specific tax implications on current income, earnings, and future distributions will vary based on whether the IRA is tax-deferred or Roth.An IRA can invest in real estate, or notes, or a whole lot of things beyond just Wall St financial products. You should check out self-directed IRA plans, which are setup to allow you to invest more broadly. There is a lot of great info here on BP on the topic.

Franky Juwana · Answer

@Christian Wathne I agreed with @Dmitriy Fomichenko , with self directed IRA options, you have more freedom on where you want your money invested in, instead have somebody else decide for you, and you also need to check how much they charge in each transaction, some investment firms are shaddy on their fees, plus you can also have others self directed IRA combined to invest in Real Estate or other ventures (*check the rules for what's allowed) Not only self direct IRA but you may also use HSA (Health Saving Account), I'd suggest give few firms some call and get some details.

Eli Howard · Answer

I have a couple questions about some of the points made:1) I was under the assumption that you can only put a max amount of $5,500/yr into an IRA until 50, then you get a slight allowable increase. 2) There is compounding interest, so if you start w/ $5,000 and invest $5,500 until 50, then the allowable investment raises slightly, you max your investment for the remainder of your 30 year period (ex. 50-60), you will end up with just over $1,000,000 after tax.Please let me know if my points are not valid and explain.

Gerald Demers · Answer

@Christian Wathne, I can pay a seller $100 from my IRA for an option to purchase a property and then I can sell that option to an investor for $5,000 right away (effectively wholesaling it). $100 to $5,000 in two weeks is an annual rate of return of 127,400% tax free if done in your Roth IRA!Your biggest partner in most investment transactions is the IRS. Why wouldn't you want to eliminate your partner? There are some that I know that generate thousands each month into front door of their ROTH IRA and because they are over 60, they take those thousands out the back door as distributiions tax free! In a taxed investment, assuming you are in a 30% tax bracket, 30% of your earnings are gone. A 10% return becomes 7% after tax. In a ROTH, 10% return is 10% return after tax. I am 53 so I am investing in my IRA for tax free income tomorrow AND investing in my business today for income today. Gerald Demers

Mark Nolan · Answer

@Christian WathneAn IRA is a tool for saving for retirement so one way to grow it is to invest it in real estate. All the rental income will flow back to the IRA. Another option is to invest the IRA in trust deeds which means the note payments will flow back to the IRA as well. Some prefer trust deed investing because deprecation does not apply to real estate owned by an IRA or a solo 401k for that matter.