A self-invested IRA is a tax-free way to increase your investment income

Have you ever imagined that you could double or even triple your current investment income without having to pay Uncle Sam your taxes? Believe it or not, it’s possible…with an IRA or 401(k). These two retirement savings accounts allow you to build wealth while saving on taxes. A self-directed IRA or 401(k) is a savings plan that gives you the power to make decisions when it comes to investing your contributions. With this type of control, you can invest and reinvest multiple times, maximizing your returns.

One of the most popular investments people make with their savings accounts is real estate. This doesn’t mean you can buy yourself a new home or get a better rate on your current mortgage, but investing 401(k) money in real estate or IRA money is a way to buy and sell real estate for a profit. A self-invested IRA ensures that your money is actively working for you, rather than sitting passively in the bank earning minimal returns.

When you set up a self-invested IRA, you’ll need to decide how you’re going to take advantage of the tax breaks provided by the government. It all comes down to a pay now or pay later situation.

If you want to “pay it now,” you can set up a self-directed Roth IRA that’s funded by income that’s already taxable. Any income from your investment is tax-free. For example, if you decide to invest in real estate, you can continue to invest and reinvest your earnings multiple times, and the gains you make are tax-free. Even if you withdraw your money in retirement, you won’t owe taxes on your earnings. Your “already taxed” contributions can also be withdrawn tax-free.

If you want to “pay later,” you should set up a traditional self-invested IRA funded by money you deduct from that year’s taxable income. Any income you receive from your investments remains tax-deferred until you withdraw it after retirement. Appropriate taxes were collected at that time. As with a self-directed Roth IRA, you have the option to maximize your returns by investing in a yield vehicle like real estate.

Investing 401(k) money in real estate is no different than an IRA. The difference is the maximum amount the government allows you to deposit into each of these accounts. A self-invested IRA is limited to a maximum contribution of $5,000 for 2008. The maximum allowable contribution to a self-directed 401(k) is $15,500 for 2008. A “pay now” or “pay later” decision must also be made when setting up a self-directed 401(k).

You’ll find that most financial institutions will discourage you from setting up a self-invested IRA or 401(k). This is because they don’t want to lose the fees and profits they get from selling and managing their own investments.

If you want to set up one of these self-managed accounts, you’ll need to find a company that specializes in managing these types of plans. These companies work to take your investment orders and deal with paperwork and compliance issues.

Make no mistake. Owning a self-invested IRA will mean taking an active role in determining your financial destiny. These savings accounts are not for people who can’t be bothered with the “tricks” and “uncertainties” of investment decisions. But if you really want to take advantage of a fantastic opportunity to maximize your income and save on taxes, then self-investment IRA or a 401(k) is the way to go.

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