It’s tax season once again, and many taxpayers are deciding whether or not to make an IRA contribution. But did you know that you should make an IRA contribution, even if you don’t get a tax deduction? You should open up a self-directed IRA, and make contributions each and every year, even if you don’t get a tax deduction.
Here are the reasons why…
TAX DEFERRAL OF INVESTMENT INCOME – MORE IMPORTANT THAN A TAX DEDUCTION
The decision to make an IRA contribution often comes down to whether or not it will be tax deductible. An IRA contribution may not be tax-deductible if you’re covered by an employer plan. You can still make a contribution, but it’s deductible only if your income doesn’t exceed a certain threshold.
For 2017, single taxpayers lose the IRA deduction once their modified adjusted gross income reaches $72,000. For married couples filing jointly, it’s $119,000. You can still make a contribution, it just won’t be tax-deductible.
But there’s something that’s more important than making a tax-deductible contribution, and that’s the tax deferral of investment income on an IRA.
The tax deduction of an IRA contribution is a one-time thing. You make the contribution, get your tax break, and move on.
But tax deferral of investment income goes on for decades. Investments continue to accumulate investment income, but since they’re held within the IRA, the income they earn is tax-deferred. A tax-deferred investment builds up much more quickly than a taxable one.
Let’s work an example.
Let’s say you have a combined federal and state income tax rate of 30%. You can earn 10% per year on your investments. Because of the tax rate, the rate of return will be 7% per year, allowing 30% for taxes. If you invest $10,000 for 30 years with a net rate of return of 7%, you’ll have $76,125.
If you instead have $10,000 in a tax-sheltered IRA, you’ll learn the full 10% on your money. There no taxes on the account until you begin making withdrawals in retirement. After 30 years, you’ll have $174,491.
That means the tax deferral will be worth nearly $100,000 over 30 years.
That’s what you give up any time you fail to make an IRA contribution.
UNLIMITED INVESTMENT OPTIONS
Even though employer-sponsored retirement plans offer more generous contributions than IRAs, as well as an employer matching contribution, they do have some important drawbacks.
The first is that you’re stuck with the plan trustee that your employer chooses. This can be an insurance company that limits your investment options to annuities with high fees. Or it might be a mutual fund family that only offers between five and 10 fund options. They may also operate through a brokerage account with many investment options, but very high transaction costs.
With the first two trustees, the insurance company and the mutual fund family, your investment choices are extremely limited. You may have to choose between a growth fund, a balanced fund, a bond fund, a money market fund, and an international stock fund. If you want to invest in anything else, you won’t be able to.
A self-directed IRA can fix that problem. With an IRA, you choose the plan sponsor. You can choose one that allows you to invest in any assets that you want, including individual stocks, an unlimited variety of mutual funds and exchange traded funds, precious metals, and even international currencies.
In this way, a self-directed IRA will give you greater investment diversification than an employer plan. You don’t have to close out your employer plan to have an IRA either. You can have both. And as noted above, even if your income exceeds the limits to make tax-deductible contributions, you can still make non-deductible contributions to an IRA.
Adding a self-directed IRA can enable you to hold many more investments than your employer plan. It can expand your investment options, when held alongside an employer plan.
ADDING MORE ASSETS FOR YOUR RETIREMENT
There’s another obvious advantage to having an IRA even if the contributions aren’t tax-deductible. It’s so obvious that it’s hard to imagine anyone would miss it, but people do every year.
That’s the fact that an IRA enables you to accumulate more retirement savings faster.
It’s simple math. If you are saving $18,000 per year in your 401(k) plan, and you’re earning 10% per year for 30 years, you’ll have about $3,119,000.
But if you also contribute $5,500 per year to an IRA for 30 years, also earning 10% per year, you’ll have an additional $953,000.
That will increase your retirement savings from just over $3 million, to just over $4 million – roughly a 33% increase.
Not only will that ensure that you’ll have an even more comfortable retirement, but it may also open up the possibility of early retirement. After all, the sooner you reach your retirement goal, the sooner you can retire.
If the IRA contributions aren’t tax-deductible, you get a bonus benefit. If you make nondeductible contributions of $5,500 per year for 30 years, you’ll have $165,000 in IRA funds that will not be subject to income tax upon withdrawal. That may be only a small percentage of your total retirement savings, but it will help to reduce your taxes in retirement.
DIVERSIFY BEYOND YOUR EMPLOYER RETIREMENT PLAN
You’ve undoubtedly heard the saying never put all your eggs in one basket. That’s a more casual term for diversification. You’ve certainly heard about diversification in connection with investments. And since saving for retirement is investing, it makes sense to diversify your retirement plans.
That means having more than one retirement plan. Even if your employer plan seems adequate for your retirement goals, having a backup plan is never a bad idea.
None of us know what the future holds. Employers do go out of business, often filing for bankruptcy. And while the retirement plans they leave behind are usually somehow protected, there have been instances where plans were either compromised or even disappeared entirely.
That may not be something you expect to happen, but it’s never a bad idea to be prepared just in case. And the interesting thing about life is that whatever it is you’re prepare for, the less likely it is to happen.
A self-directed IRA can provide you with that extra layer of protection and certainty.
HAVING MORE THAN ONE SELF-DIRECTED IRA ACCOUNTS
Self-directed IRAs are available across the investment universe. You can open one through a diversified investment broker, through a mutual fund family of your choice, or even through one of the increasingly popular robo-advisor platforms.
You can even have two or more self-directed IRA accounts – and that’s not a bad strategy either.
For example, in addition to having your employer sponsored 401(k) or 403 (b) plan as your base retirement account, you can have a self-directed IRA with a diversified investment broker where you trade stocks and individual securities. You can also have a self-directed IRA with a robo-advisor, where the account will be automatically managed for you.
But then you can have a specialized self-directed IRA, such as one that allows you to invest in physical gold and silver, and international currencies.
Investors often don’t realize that IRS regulations permit you to hold just about any type of investment in your IRA. They do have a list of prohibited investments, but it’s very short:
- Metals – with exceptions for certain kinds of bullion
- Coins – (but there are exceptions for certain coins)
- Alcoholic beverages
- Certain other tangible personal property
Any other investment you can think of can be held in an IRA, and should be considered.
OPENING A TREASURY VAULT SELF-DIRECTED IRA
You can do that with a Treasury Vault self-directed IRA. You won’t just be holding certificates indicating that you own a certain amount of gold, silver or foreign currencies. The actual physical assets are held in a Treasury Vault self-directed IRA.
Physical custody is more important than most investors generally assume. Most investments people hold are notations indicating an ownership stake. In reality however, the actual investments are owned by the plan trustee. Your ownership represents your share of that asset position, but not the actual asset.
In a financial meltdown, or some other global crisis, this can become much more important than most people currently realize. Ownership of the actual assets is the most secure way to own any investment. Anything less could be settled at something lower than actual value in the aftermath of a financial disaster.
Gold and silver in particular represent portfolio insurance. Since they do not represent another party’s liability, they won’t collapse in a financial meltdown or other crisis. That quality alone tends to make them more valuable in just such a crisis.
And currencies, particularly thinly traded “exotic” currencies, represent the kind of speculation that tends to pay off handsomely during asymmetric investment markets.
Very few investment brokers will enable you to hold both physical precious metals and foreign currencies. A Treasury Vault Self-Directed IRA is one of the few that will enable you to hold both. They’re a specialized type investment, and require the services of a plan trustee that knows how they work, and how best to hold them in your portfolio. You can even use a Treasury Vault Self-Directed IRA as part of working with an IRA administrator of your choice.
You can call us at 1-888-348-2441 to get more information, or to set up a plan.