The case for and against IRA / Self Directed IRA

[Terry Royce]

Currently I do not have any IRA / 401k, and I have been looking at starting and depositing into one before tax day deadline for 2011.
I have previously just bought stocks and/or mutual funds

However, the more I think about it, the more I'm not so sure about having a IRA/401k.

I was planning on rolling it over into a self directed IRA in a year or two to purchase investment properties, however, the long term lack of access to the cash really is starting to bother me, and I'm thinking that even though I will not have the tax shielding from the retirement plan, having the flexibility and access to money for investments or business opportunities will provide more chance for growth.

What are the arguments for and against having 401k/IRA from the professionals here, and those with experience in these.

Thanks

[Jeff S.]

Originally posted by Terry Royce:

… the long term lack of access to the cash really is starting to bother me, and I'm thinking that even though I will not have the tax shielding from the retirement plan, having the flexibility and access to money for investments or business opportunities will provide more chance for growth.

.

This is incorrect on several counts. The whole idea behind a self-directed retirement account is to provide immediate and long term access to retirement cash that you couldn’t otherwise touch and, more important, to allow the money to grow tax deferred. Not to minimize it, but about the only things you can't do in any self-directed retirement account are invest in insurance, collectibles, and with your lineal descendants. Real estate is open game. Yes, you also can’t touch the money until age 59 ½ but why is that bad? You seem to believe you are able to earn more with your money after it’s taxed annually? Assuming it's long term, please fill us in on this strategy.

With marginal state and federal tax rates totaling around 40% I do not buy the argument that you could do better outside of a retirement account. Even if you just kept up with inflation you’re further ahead of the game than giving roughly 40% of your marginal earnings away each year. Simple time value of money calculations will easily show a greater future value of untaxed money with even nominal returns, compared to after tax money using whatever high returns you think you can earn. Please prove this wrong.

Originally posted by Alan Mackenthun:

With any tax deferred investment, you're betting that your tax rate in the future will be lower than it is if taxed now.

No, this is not why you invest in tax deferred accounts. It’s an ancient argument to which sensible investors no longer subscribe. Sorry. It worked in the ‘50s and 60’s when you could retire with no income other than social security and a reliable company pension (then tax free), but no more. We’re all living longer, more active, healthier lifestyles and there is no reason to believe the amount of money we need after retirement should be substantially less than before.

True, the kids might be gone and the house paid off, but the opportunities to do the things we deferred in life are now available. Everyone will need a substantial source of income after retirement and this income will normally be open to taxation. There is no bet here; taxes will be higher in the future and you will be subject to them. I hope I’m just stating the obvious when I claim that you’re better off growing your money tax free for decades than paying taxes in small pieces along the way and also on what’s left of it after you retire.

For me, I believe that you must take advantage of the tax code as it exists. That is, invest in hard real estate assets and other tax advantaged investments outside of your retirement plan and less tax advantaged opportunities such as notes and lending inside your plan. Use the tax code against itself to the degree you legally can. But don't cut yourself off from the simplest and most substantial tax break the government allows.

Jeff