With almost no exceptions, profits made on transactions in your self-directed IRA are not taxable, no matter how fabulously profitable they might be. But today, I show you why the taxable kinds of transactions in your self-directed IRA may actually be the most profitable of all. My name is Bryan Ellis. This is episode #293.
Hello, self-directed investor nation! Welcome to the show of record for savvy alternative asset investors like you, where in each episode, I help you to find, understand and profit from exceptional alternative investment opportunities!
My friends, imagine with me a large grid, a tic-tac-toe type of board with a total of 1,000 spaces within it, each of which represents a different way to invest the money in your IRA.
Of course you see the usual suspects. There are stocks, bonds and mutual funds. There’s rental property, precious metals, private loans, even cryptocurrencies like Bitcoin. Every conceivable investment is listed in the 1,000 spaces of this grid.
And nearly every space in that grid – let’s say 995 of the 1,000 spaces – they all have a green background. The other 5 spaces? Well, they have a red background.
And the difference is simple: Profits generated by those investments aren’t taxable to your IRA, just as you’d expect. But the other 5 spaces… those with a red background… well those are the very rare investments that actually require your IRA to pay taxes for the year in which the profit was made.
There actually are investments like that. For example, if you do a lot of real estate flipping in your IRA… or if you run a business in your IRA… or if your IRA generates income from borrowed money… those types of things are considered by the IRS to be “active income” rather than “passive income”, and active income isn’t shielded from income taxes by your IRA. Thankfully, that applies to very, very few investments… in the case of our hypothetical grid, only 5 investments out of 1,000.
And before we move farther, I failed to invite you to participate in this discussion, so I’ll do that now. Feel free to give us a call toll-free at 833-SDI-TALK or to reach out by email at email@example.com. Better yet, stop by the resource page for today’s show at SDITalk.com/293 and leave your comments and questions there.
So our grid of 1,000 different investment opportunities shows clearly that the overwhelming majority of them are going to be totally tax-free to your IRA. So why would one ever even consider investing in one of the tiny majority of investments that actually create a present-day tax burden for your IRA?
Well, my friends, you wouldn’t even consider doing this… unless you were pretty smart. Hehehehe
So here’s my operating premise: With your retirement savings, time is your ally. The more time you have, the longer your retirement savings have to grow, to compound on themselves, to build to a point of financial independence for you. Time is, undoubtedly, the friend of your retirement savings. And to that end, anything that gives your retirement more time to grow – whether in fact or merely in effect – is a very good thing.
So with that operating premise, consider this:
Let’s just say that you have a talent for flipping real estate, one of the types of investments that generates taxable income for your IRA. It doesn’t have to be flipping, it could be anything that results in active income. But we’ll use real estate flipping for simplicity sake.
You’re a good real estate flipper and when it’s all said and done, you typically bring in $60,000 in gross profit per year by doing 2 or 3 flips outside of your IRA. But you make a change and do all of your flips inside your IRA one year. How does that work out for you?
Well, it’ll be expensive tax-wise. Your IRA will pay income taxes on those profits at a rate of around 40%, so your $60,000 quickly drops to a net profit in your IRA of $36,000.
Ouch… painful, right? Why would you ever consider doing that?
Well, for a very good reason, it turns out. And that reason is that you’re playing the LONG GAME in your IRA, not the short game.
So ask yourself this: In a typical year, how much do you contribute to your IRA? The largest contribution allowed annually for most people is $5,500 per year so at that, putting another $36,000 in your IRA is the equivalent of making a bit over 6 ½ years of contributions… but all at once, in a single year!
In effect, you’re BUYING 6 ½ years of extra time for your IRA to grow and compound, because you’re getting a larger chunk of money in there much, much sooner. We’ve all seen the charts that show the extraordinary difference of starting retirement savings at age 25 versus 35 or 45… and the difference is HUGE.
Well, by being willing for your IRA to pay the income taxes on active income, you’re essentially turning back the clock. You’re giving yourself a leveraged way – active effort – to grow your IRA balance, because no longer are you limited to contributing $5,500 per year… you can essentially put in as much money as you want each year, by way of generating active income using your own expertise. Yes, there’s a price to it, and that price is the payment of income taxes on the profits generated through your active effort… but there’s a benefit… a GRAND benefit… and that benefit is the ability to buy back time, to literally make up for lost time, through the leverage of active income generation in your IRA.
And my friends, if the ability to buy back time wasn’t enough of a benefit for you, I can show you how to SLASH the amount of taxes your IRA will have to pay on that kind of income in half. Would you be interested? Of course you would! That’s why you should be sure to listen in to the next episode of this very show, where I’ll tell you exactly how to make it happen!
My friends, I hope you’ve enjoyed this fun-filled, info-packed, full-to-the-brim exciting episode of Self-Directed Investor Talk, and remember this:
Invest wisely today, and live well forever!
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