Self Directed IRA - A Better Choice?

Taxes can be one of the greatest destroyers of wealth. The government has provided a way to accumulate wealth tax-free using an Individual Retirement Account (IRA). Most people are familiar with the typical IRA that usually holds money market funds, bonds, and stocks. IRAs are often set up through an employer known as a 401(k). Additionally individuals can set up an IRA through a bank or brokerage. What most people don’t know is there is a way to set up an IRA to buy real estate, invest in oil drilling, or just about any other business. The IRS requires that these transactions be held in a self-directed IRA. 
Before we explore the self-directed IRA, you need to know that there are two different flavors of the typical IRA – the traditional IRA and the Roth IRA. The traditional IRA is the most common and allows individuals to put money away for retirement with pre-tax dollars. That means your taxes are reduced for the tax year in which the money is set aside. For example, a person in the 28 % tax bracket saves $28 in taxes for every $100 put into an IRA. There are income limits and maximum amounts that can be set aside. The IRS allows this money to compound tax-free until withdrawal. 
The Roth IRA uses after-tax dollars. Unlike the traditional IRA, there are no tax breaks for the tax year in which the money is set aside. Money in the Roth IRA is taxed before it goes in, however is not taxed when a withdrawal is made (there are age requirements). The income limits on Roth IRAs are more stringent than the traditional IRA and you are also limited in the amount that can be set aside annually. 
If you’ve been watching the stock markets over the past few years, you know that your retirement money may not be growing as fast as you’d like. Here comes the self-directed IRA. There are several companies that provide self-directed IRAs and I encourage you to do your research of the different companies. Personally, I use Equity Trust. 
Self-directed IRAs allow you to use numerous investment vehicles that typical brokerage accounts do not offer. Your self-directed IRA can be either a traditional or Roth IRA. There are benefits to both; however that is a subject for another time. Rather than share all the various investment vehicles available with a firm like Equity Trust, I will just share the things I’ve done over the last few years. 
Equity Trust allowed me to create a promissory note and loan money to a hard money lender. My money earned 12% per annum. I used my account to partner on a 344 unit apartment complex. The deal came my way through my network and I was able to participate through a tax-deferred account. Currently I am receiving a little over 9% annually from cash flows. Our anticipated sale or cash out refinance will be in a few years. Based on the current market prices, we anticipate an additional 11% per annum in appreciation. That’s 20% growth per year! Currently I’m preparing to do a hard money loan for three points and 12% interest. Additionally, I am currently doing due diligence on a project involving land and natural gas. 
As you can see, this is not your broker’s IRA. Some additional things you can use the self-directed IRA for include: wholesaling, options, lease-options, fix and flip, warehouses, storage units and the list goes on. This is a fantastic way to build a nest egg for retirement. 
Please note that none of this is intended to be legal or tax advice. Before you make any investments, you should seek the council of a qualified accountant or tax advisor.