Did You Know You Could Grow Your Retirement by Investing in Your Area of Expertise?
Stick to what you know. You’ve probably heard that advice before. Whether you’re looking to write about something, teach something or begin the next phase of your business venture, often this advice remains true.
But while we are all so ready to follow this advice as it pertains to other aspects of our lives, there is one notably important category where we don’t always stick to what we know, and our results are hampered by it.
Why don’t we stick to what we know when it comes to investing? How could it benefit us (and our businesses) if we did?
Investments that make sense
You may be thinking: If I don’t know investing, are you telling me not to invest? Hardly. Sticking to what you know means channeling your knowledge and wrapping your investments around solutions where you have inside insight.
For example, let’s say you’re a real estate agent. Your career ensures you know the real estate industry very well. It also allows you the opportunity to use this knowledge to benefit your retirement in a tax-advantaged way.
Whatever your expertise, you may use that knowledge and passion to support retirement for you and your employees.
Bringing the solution to life
Now, how do you bring it to life? How do you leverage the knowledge you already possess to support your retirement goals?
Enter a self-directed account.
Self-directed accounts are a type of individual retirement account (IRA). However, what makes a self-directed account different is your ability to fill your account with several alternative investments that would normally not be allowed in a standard IRA. While the account will be managed by a trustee or custodian, you are responsible for charting the account’s path, hence the term self-directed.
These accounts can be Roth IRAs and traditional IRAs, among others. But while conventional IRAs allow you to invest in certificates of deposit, bonds, stocks, mutual funds and exchange traded funds, self-directed accounts expand your possibilities.
With a self-directed account you can invest in the options previously described as well as the following:
- Precious metals
- Real estate
- Private entities
- Tax liens/tax deeds
- Promissory notes
- Trading accounts and foreign currency
- Other investment options
These are just a few examples of ways in which you can empower your retirement through a self-directed account. We’ve also seen investors use their knowledge of self-storage facilities to grow their account and we’ve seen those involved in the home restoration business tie their retirement accounts to the activity of their business.
If you have a passion or inherent knowledge base rooted in a particular industry, it’s worth researching to see if that skill set can be utilized in a self-directed account.
Considerations with Self-Directed IRAs
While the benefits of self-directed accounts may seem obvious, there are some factors you need to watch out for as well. These include:
The fee structure gets more complex when you enroll in a self-directed plan. Most plans have a one-time establishment fee, but you can also expect to see any or all of: first-year and renewal annual fees as well as fees tied to the paying of your investment bills.
Transaction bylaws to consider
While your transaction and investment options are expanded, should you complete a prohibited transaction, you run the risk of the entire plan being paid out — and exposing yourself to the taxes associated with this as well as a penalty.
Your custodian can answer some questions you may have but remember they cannot offer financial advice, so it’s up to you to do your due diligence before completing any new transaction. You can also find more in-depth support by working with a financial advisor.
In addition, it’s also important to remember that, depending on the nature of your transactions, you could run the risk of breaking rules pertaining to self-dealing. For example, if you are a real estate agent, the rules governing a self-directed account prohibit you from taking commission on any property you buy in your IRA.
To read more about the rules, review IRS Publication 590.
Determine your exit plan
When you first enroll in a self-directed account, an exit plan may be furthest from your mind. However, it’s in your best interest to have at least an idea of what your plan would be ahead of time.
While bonds, mutual funds and stocks are easy to sell if you choose, self-directed plans are different. For example, if part of your plan includes selling real estate your IRA owns, you’ll need to allot time to find a buyer when you wish to sell.
All of this means you need to start planning your exit and how you will close out these aspects before you need to start withdrawing money in retirement.
Opening your own self-directed account with the right custodian
Unlike a traditional or Roth IRA, not every IRA provider is qualified to open a self-directed account. You can learn more about finding the right provider here.
All of this requires a little extra work on your end, but your inherent knowledge in the field provides you an advantage you may not find in a traditional stocks/bonds model. It could be a rare opportunity to match your needs with your inherent knowledge and passion.
According to the IRS, a prohibited transaction is improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person. Examples of prohibited transactions with an IRA are borrowing money from it, selling property to it, using it as security for a loan and buying property for personal use (present or future) with IRA funds.
Equity Trust holds a variety of IRAs, as well as other self-directed accounts, including:
- Traditional IRA
- Roth IRA
- Simple IRA
- SEP IRA
- Solo 401(k)
- Roth Solo 401(k)
- Health Savings Account (HSA)
- Coverdell Education Savings Account (CESA)
With a self-directed IRA, your investments are up to you, within the bounds of the IRS rules and guidelines. The IRS does note provide guidance on what investment types are permitted, but dictates only what is NOT permitted. Examples of prohibited IRA investments include collectible (such as artwork, stamps, rugs, antiques and gems), certain coins and life insurance. See IRA Publication 590 for more information about prohibited investments.
To learn more about self-directed accounts and to see how Equity Trust can help you, contact us today.
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