22 years to $1.6 Million in Your IRA - A Conservative Path

In a recent article, I wrote about The Power of Compounding Tax Free in your self-directed IRA account. I showed how savings can grow much faster inside vs outside your IRA (see graph below).

But even if you like the idea of tax free IRA investing in real estate, you might wonder how it works in reality. What kinds of real deals and numbers could actually grow your retirement nest egg to $1.6 million in a very methodical, conservative way?

So in this article I’d like to share a simple path that could be implemented using a self-directed IRA buying real estate.

The Rental Property Plan

This plan involves buying rental properties with your IRA account. My example involves a 40-something married couple who each has their own ROTH IRA account. Therefore they can each make max contributions yearly, and then they can invest their accounts together as partners.

Like normal rental property investing, your IRA account could own the properties directly (not usually recommended) or by way of an LLC. It is also possible to use leverage (debt) with your IRA as long as it is non-recourse in nature.

In my example, however, we will invest more conservatively and assume you save enough money to purchase all properties for 100% cash.

Let’s assume you pick a location for rentals that produce good cash flow. After a lot of searching you find a little duplex that you can purchase for a total cost of $60,000. This means you will need at least $60,000 in your IRA to start (or $60,000 total between the two spouse IRA accounts).

Here are the numbers for your rental duplex:

RENT: $500/mo per side or $1,000/mo total.

EXPENSES: $400/mo for management, maintenance, taxes, insurance, and vacancy

NET OPERATING INCOME: $600/mo ($1000 – $400) or $7,200/year ($600 x 12).

Your cash return on this unit is $7,200/$60,000 = 12%. Not bad.

Now each year you also contribute personal savings to your IRA (we’ll assume $10,000 per year), and you also deposit and save 100% of the net cash from rents until you can buy another equivalent rental unit for $60,000. Then you do it again, and again, and again.

As you can see in the diagram below, the compounding effect means you start buying properties faster and faster over time.



In under 11 years you have 6 houses x $60,000 or $360,000 saved, not including potential appreciation.

Fast forwarding this scenario, if you kept up with the plan of reinvesting all cash into new rentals, by the end of year 22 your IRA would own the following:

27 rental duplexes

$60,000 x 27 = $1,620,000 total cash invested

$7,200 x 27 = $194,400 per year in net rent.

Could this deal get any better? Yes it can.

What if your IRA had been a Roth IRA that allows your investment to GROW tax-free and then also be DISTRIBUTED tax-free.

That would mean at retirement age (59.5 years old) 100% of that $194,400 could be taken out of a Roth IRA each year without any tax payments. To put that in perspective, if you are in the 40% tax bracket, you’d have to earn $324,000 to have the same after tax spending power as this Roth IRA scenario.

So not only have you built a sizable net worth, more importantly you have plenty of income that you can live off of without “eating” any principal.

Parting Encouragement

My example makes a lot of assumptions for sake of simplicity and explanation, but the basic concept works. People (including me) invest in real estate IRAs and compound their earnings this way all the time.

You could also start investing your IRA in real estate today. Good deals are sitting out there waiting for you. The more time you wait the more you let the power of compounding work against you and not for you.

I hope this little plan will inspire you to get started on your own IRA nest egg today.

Enthusiastically your coach,