September 17, 2020

It's a Good Day for a Roth IRA

There are two types of Self Directed IRAs: Traditional and Roth. Both give you the opportunity to buy, sell, or trade assets without incurring a capital gains tax. Being Self Directed, they also both offer the freedom to invest in alternatives (such as real estate) that may provide a more stable revenue stream than the volatile stock market.  

However, there are key differences between the two types of IRAs. With a Traditional IRA your funds are tax-deferred. That means that you do not pay taxes on your contribution now but will do so on future distributions. In fact, once you reach age 72, you must take out a RMD (Required Minimum Distribution) and pay taxes on that withdrawal.  

On the contrary, Roth IRA contributions are taxed now, resulting in tax-free distributions later. But why would you want to pay taxes now when you can put it off for years?

Advantages of a Self Directed Roth IRA  

That upfront tax payment actually comes with a lot of benefits. 

  • Increased Savings - Not only can your principle be taken out tax-free, but so does your profit. 
  • Flexibility - You can access your Roth IRA contributions at any time and for any reason, making it a great emergency savings account. (However only contributions can be taken out tax-free. Earnings cannot be accessed until after you turn 59 ½ years old and your account has been open for at least 5 years. If you need to distribute the Roth before this time, you will pay taxes and an early withdrawal fee.) 
  • No RMD - You already paid your taxes upfront, so the IRS does not require you to take out your Roth IRA funds. You can save your funds for your retirement or pass the account on to your heirs.   

Which Type of Self Directed IRA Should You Choose? 

When considering what IRA option is right for you, consider three factors: age, income, and asset performance. 

Age & Income - The younger you are, the more time you have to grow your portfolio and take advantage of tax-free growth. Typically, younger investors have a lower annual income. This means they could possibly have a lower tax bracket now than when they retire. In that scenario the after-tax contributions would be more productive. On the other hand, if the investor is at the height of her career and earning a peak income, a Traditional IRA makes more sense since she will be in a lower tax bracket in the future.  

Asset Performance - It’s beneficial to understand how your investment is predicted to perform. For example, if you own a rental property, it may be better to pay taxes on the contributions now if you expect to see high profits in terms of rental income and sale price. Similarly, if you expect that your desired property will lose value during a tax year, you may consider a Roth IRA since your income bracket is lower than it would be when your property is booming.    

Talk to a Specialist  

Before a decision is made, it is important to analyze which Self Directed IRA is the best fit for your specific scenario. A financial advisor can help with this. Once you understand which IRA is the most beneficial for you, call a Madison Trust Specialist to make your investment process as seamless as possible. We will guide you every step of the way.  

Got Questions?

Speak with a Self-Directed IRA Specialist.
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