Individual Retirement Accounts. It’s enough to put you to sleep isn’t it? However there are very sound reasons for you to understand Iras, and to set one up for yourself. If you’re interested in a comfortable retirement you need to understand Individual Retirement Accounts.
What are Individual Retirement Accounts, why would you need one and which is the best one for you?
An Individual Retirement Account, or what is also known as an IRA, is an account that individuals may set up to plan and invest for their retirement. The IRA was enacted into legislation in 1974, however it was only in 1981 when significant changes were made to the tax status of IRAs that they became popular.
It is the tax status of Individual Retirement Accounts that make them extremely attractive to people who are seeking to invest for their retirement to ensure that they have a well funded comfortable retirement when they are no longer able to work and so can no longer earn an income.
In it’s wisdom the government recognized that it was extremely difficult to provide sufficient retirement benefits from the public purse so that all retirees could retire in comfort on a government pension. This was recognition of the fact that over time, as the population ages, the public purse would not be able to afford to pay full retirement pensions to everyone, so the government needed to come up with a plan to make individuals invest for their own retirement.
The way to do this was to offer people incentives to do so by way of tax advantages though their IRAs.
So when money is deposited into an Individual Retirement Account it is tax deductible, and all income made through investing the fund during it’s life is also tax free.
That doesn’t mean though, that money is never taxed on the way in or way out of an IRA. What the government does is to tax the money as it is taken out of the IRA, it is taxed as ordinary income.
One of the great barriers to successful investing is the requirement to pay tax each time income, or a capital gain, is made. Throughout an investors investing life it is necessary to realize funds along the way to pay tax. This seriously reduces the ability to earn high returns on moneys invested because capital is being taken out all the time to pay tax, and so there is less to invest along the way.
However if, though an IRA, it is possible to invest and reinvest all income and capital back without paying any more tax, that increases massively the potential returns that someone can make investing. Hence the reason why an IRA is so attractive to individuals. An IRA can take maximum advantage of the power of compounding.
An Individual Retirement Account is required by law to be held in trust by a “custodian” who is often, or usually a bank, broker or insurance company. There are various regulations governing what your IRA custodian can do with the money, some imposed by tax law and some imposed by the custodians rules as well.
Usually traditional IRA custodians have restrictive rules about what investments the IRA can be invested in, and the funds are usually directed to investments owned by the custodian. This may be good for the custodian, but not necessarily so good for the owner of the IRA, who may not be earning the best returns.
It is also quite possible to have a self directed IRA. This is still held by a trustee, or custodian, however has a much less restrictive range of rules about the types of investments that can be invested in. The owner of the self directed IRA, or what is also known as a self managed IRA, can direct the investments into a wider range of investments that should, over the life of the fund, make much better returns. Add to that the power of compounding and the difference between the returns on a traditional IRA held by a custodian who invests the funds into their own investments, and a self directed IRA invested by the owner, can be massive.
So as you can see there are powerful reasons why you need your own Individual Retirement Account, and there are also powerful reasons why you need it to be a self directed IRA. In particular the best reason is that the best investment for your IRA is in real estate. Over time real estate offers the most stable long term investment, both for an IRA and any other investment. Investing your Individual Retirement Account in real estate offers significant long term benefits, however so many people don’t do so, either because they don’t know that they should, or because the rules of investing their IRA funds don’t allow them to do so.
They need to rollover their funds into a self directed Individual Retirement Account and start making some solid decisions to invest their retirement funds in real estate.
Even in the current market there are some outstanding and extremely solid investments in real estate. One in particular offers no money down investing for both credit investors and IRA investors, with tenants supplied and high quality homes to invest in. Returns are guaranteed and it’s a turnkey investment in real estate from a solid US public company with significant experience in real estate investing.
So, despite the fact that learning about Individual Retirement Accounts might send you to sleep, there are very good reasons to start learning anyway. And if you’re setting one up make sure it’s a self managed IRA, and that you invest it in solid real estate investments amongst others.
You’ll be glad you did when you retire.