Even with the large number of Individual Retirement Accounts that exist in the United States, there is still a surprising amount of misinformation that exists about them.
And this misinformation isn’t simply an academic matter with unimportant consequences; not having an accurate understanding of how IRAs work can end up costing you money that you’d otherwise have available for retirement. Here are some of the most common myths regarding IRAs that you need to be on the watch for.
Myth: Using an IRA to Buy Real Estate or Private Equity Raises Red Flags.
Unfortunately, this IRA myth never seems to go away. The IRS regulations on Individual Retirement Accounts permit a very wide range of investments, including real estate, private equity, private debt, certain types of precious metals, and more. Unfortunately, many IRA custodians are more restrictive than the IRA regulations actually require, so investors assume that the less common investments are simply not permitted. Using a custodian such as Quest Trust Company for a “self-directed IRA” can open up a wider range of investments.
Myth: It’s Always Best to Start Contributing to a 401(k) Before Opening an IRA.
Retirement savers have a number of savings and account options available to them; the most basic of which is whether to open a 401(k) plan through their employer (if one is offered) or an Individual Retirement Account. Of course, if you can afford to make maximum contributions to both, then that’s likely to be the ideal solution.
If you’re only able to afford contributions to a single account, you’re likely to find that contributing to an IRA is a better choice than your 401(k) because of greater investment options and unique tax advantages in the case of a Roth IRA.
Myth: Converting to a Roth IRA is Too Expensive.
You might hear claims that because you’ll face a large current year tax bill when you convert an IRA from a traditional account to a Roth structure, it’s rarely worth doing. In truth, converting to a Roth IRA can be a great long term decision for many account holders. In addition, in some situations you can “undo” a conversion if your account drops significantly in value.
Myth: You Must Pay Cash to Buy Real Estate With a Self-Directed IRA.
One of the great strengths of a self-directed IRA is the ability to hold a wide variety of asset classes, including real estate. Unfortunately, there is misinformation out there surrounding how exactly the purchase of real estate must happen within a self-directed IRA. You are permitted to use outside financing to purchase real estate with your self-directed IRA, provided that only the IRA account (and not the account holder personally) is liable for repayment.
By separating fact from fiction you’ll be sure to get the greatest long-term value out of your IRA.