The Wealthy Are Actively Using This Roth IRA Strategy, So Can You
The tax benefits of a Roth IRA are well documented, but they may not be as well known. Some ultra-rich individuals have amassed hundreds of millions – if not billions – of dollars in these tax-advantaged accounts, reports CNBC.
See: Roth IRA Rules – What You Need To Know For 2021
Find out: should you choose a Roth IRA or a traditional IRA – or both?
A Roth IRA acts as a tax shelter. Contributions are taxed up front because they come from income on which you have already paid taxes. Your money grows tax-free and you make tax-free withdrawals in retirement. Traditional IRAs work the other way around: you make contributions in pre-tax dollars, the money grows tax-deferred, and you pay taxes when you start withdrawing money from the account in retirement.
Roth IRAs have grown in popularity in recent years for the future tax benefits they offer to investors. Although there are income limits on direct contributions to a Roth IRA, investors with higher income can convert assets from a Traditional or 401 (k) IRA to a Roth IRA.
Recently, PayPal billionaire co-founder and billionaire Peter Thiel grabbed the headlines when news of his Roth account broke. Starting at a value of $ 2,000 in 1999, Thiel used a self-directed IRA to amass a tax-free fortune of $ 5 billion. So how did he do it?
See: How Much Should You Have in Your Retirement Fund at Each Age
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Theil used the self-directed IRA strategy to ensure tax-free distributions and grow his account by leaps and bounds. As with a Roth IRA, the self-directed IRA allows you to have tax-free growth and distributions, but it allows investors to invest in assets that are not available for Roth IRAs. While a Roth IRA invests primarily in mutual funds and publicly traded companies, self-directed IRAs can hold real estate and private companies, which is not allowed in a Roth. However, this type of investment strategy is generally suitable for those with specialist knowledge in a particular sector or industry, just like Thiel in technology.
Real estate in particular is a game-changer for IRAs. Let’s say you find properties that you think have potential and you deposit $ 3,000 through a self-directed IRA. This could be as high as $ 10,000, $ 20,000 or $ 30,000 depending on the property you choose, and all of the profits will flow back to you tax-free. However, there are special rules for a Self-Directed IRA that you must follow to take advantage of the tax benefits. These include what type of property you can buy, how you can buy it and manage expenses, and who can use it.
It’s important to note that the same distribution rules that apply to regular IRAs also apply to self-directed IRAs. That is, there is a lack of liquidity, and the earliest you can get your money is at age 59 and a half, with minimum distributions required from age 72. Other rules include due diligence, anti-fraud and transparency. The list goes on, but this type of investing strategy can potentially pay off more than most if you have the courage and patience.
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This article originally appeared on GOBankingRates.com: The Rich Are Actively Using This Roth IRA Strategy, So Can You