For many individuals, their self-directed IRA will eventually become the biggest single financial asset they have. Over the course of several decades of maximum contributions and smart investing, their account can end up contributing significantly to their family’s overall wealth. Here are some best practices for helping you use your self-directed IRA to grow your own family’s wealth.
Convert to a Roth Self-Directed IRA
The first idea is misunderstood by many, even though it can provide significant long-term wealth creation. Apart from the differences in deductibility of contributions, the main difference between a Roth IRA and a traditional IRA is the taxation of investment gains within the account. Investment gains on a traditional IRA are taxed upon withdrawal – which means that they are “tax deferred” in the long term.
But withdrawals from a Roth IRA during retirement are never taxed. This means that the investment growth within a Roth account is truly “tax free.” This distinction can lead to much greater wealth for your family in the long term.
Think Outside the Box
Using your self-directed IRA for estate planning purposes is one of the most obvious ways to grow your family’s wealth, but it’s certainly not the only one. If we look at the correlation between education and income over the past several decades, for example, we can see that individuals with a college education tend to significantly out earn those without degrees.
But as the price of a college education has skyrocketed, many families are finding it difficult to get the best possible education for their children. Fortunately, you can use your self-directed IRA as a supplement to whatever other resources you’ve accumulated to pay for your child’s college education.
In general, if you withdraw funds from their self directed IRA before you’re age 59½, you’ll be hit with a 10% penalty (plus any taxes that would ordinarily apply). But if you take this pre-retirement “early withdrawal” in order to pay for qualified educational expenses for your child (or any foster children, adopted children, or grandchildren), then you won’t be subject to this 10% penalty. It may or may not be to your advantage to use these funds for educational expenses (depending on what other accounts you have in the size of your overall nest egg), but it’s good to know that you have that option available.
Maximize Your Contributions
Finally, one of the best practices for growing your family’s wealth in a self-directed IRA is also one of the simplest. You can greatly boost your account balance by maximizing your contributions each and every year. You’ll never be able to go back and make up for any amounts that you could have (but didn’t) contribute in prior years, so it’s important that you take advantage of your maximum allowable contribution year in and year out.