Should I start a Self-Directed IRA?

Question

I'll set the context of my question: I am 27 yr old self-employed individual with no IRA or 401K currently in place.

I've heard self-directed IRA's explained and I can definitely see the benefit to someone who already has money in retirement account that isn't getting much of a return, and would like to tap into the money.

My question is should someone that does not have money set up in any type of retirement put that money is a self direct IRA? My tax accountant has showed me the tax advantages. Is it just a better alternative to a traditional IRA or should everyone have one?

Brian Eastman · Answer

@Chris Elliott

Setting up a retirement plan and getting some capital into that will have tremendous long term financial benefits for you.  DO IT.

As has been noted, the particular type of plan and how you fit retirement plan contributions into your overall tax/savings strategy is a pretty extensive set of questions, and working with your tax advisor is the best place to start.  One thing you will want to be sure to examine is whether to pursue a tax-deferred and/or Roth strategy.  A nice feature of the Solo 401k is that it allows you to do both.

Often times for a person early in their savings career such as yourself, a self directed plan may or may not immediate have benefit.  You can establish a very low cost IRA or Solo 401k with a mainstream brokerage and focus on the contribution side for a few years.  Once you have some capital in the account, transitioning to a self-directed plan is simple.  The ability to invest in real estate, private lending, etc. takes some capital, so get to that point first.

But absolutely, start putting the tax sheltered benefits of a retirement plan to work sooner rather than later.  When you are 40, you will be glad you did.  When you are 65, you will be really, really glad you did.

Dmitriy Fomichenko · Answer

@Chris Elliott

It will be more beneficial for you to setup a self-directed Solo 401k, look into this vehicle instead. There is a two-fold qualification criteria that one must meet in order to set-up this plan: 1) have presence of self-employment activity or own a small-business & 2) absence of full time employees working for you.

One of the main advantages of this plan that you can take advantage of is it's high contributions limits (up to $53,000 compared to $5,500 for a Traditional IRA). Since you don't have another account to rollover this will be huge for you. In one year you can contribute sufficient amount to begin investing (that would not be possible with an IRA because of the low contribution limit).

There are number of other benefits that you can take advantage of, I'm not going to repeat them here but you can check out my blog post here on BP:

www.biggerpockets.com/blogs/2810/blog_posts/21298-...

Hope this helps!

Bryan O. · Answer

It was only mentioned once in the thread, so I'm going to mention it again. ROTH. Unless you need to defer some taxes this year, make sure you have a Roth component for your solo 401k or get a Roth IRA. As you have "spare" money, toss it into Roth to help your investing. As you need to defer taxes, place it in Traditional.

However you do it, "Do iiittt NOWWWW" (Arnold voice) to get your exponential returns going!

Mark Nolan · Answer

@Chris Elliott

Its is always a good idea to have a self-directed IRA or a self-directed solo 401k (or even both in some cases). Reason being, with a self-directed account you can diversify your retirement next egg which is always important. In other words, it is not a good idea to only invest your retirement nest egg in only stocks or reals estate, for example. Instead, your next egg should be invested in a basket of investments.

Loren Whitney · Answer

Regardless of the self-directed vehicle you decide to operate, you should consult with a tax specialist that can sit down and review your particular circumstances (tax wise).

You can begin by determining if pre-tax or post-tax savings are right for you. You may even find that a combination of the two  works well. The solo(k) A.K.A individual 401(k) is most definitely a flexible option as Dmitriy mentioned.

Good luck!

Dmitriy Fomichenko · Answer

Chris, with self-directed Solo 401k plan you have virtually limitless investment opportunities, from real estate investing, to being private lender, investing in tax-liens, precious metals, and much much more.

Chris Elliott · Answer

Thank you for the response. I guess my question would still be is, are the restrictions that would be put on how the money is used worth the tax benefit?

Should I start a Self-Directed IRA?

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