You’ve likely thought about retirement, many times. What you want to do, when you want to do it.
The conversation inevitably turns to how much money you’ll need. Unfortunately, (mainly due to finances) the retirement age is going up. Today, 62 is the average in the U.S. for current workers, and it’s expected to increase to 66. Not to mention, women retire with less than men.
Many are starting to realize this isn’t the ‘American dream’ we bought into or worked our lives for.
Now, it’s not all doom and gloom. If you’re a W2 employee, you do likely have a company pension plan or have set up your own.
With the current economic environment and its continuous flood of news on recession, job losses, and increasing interest rates, plus the glaring retirement statistics — what can be done to retire earlier with money money? — and why does only 2% of American citizens with retirement accounts know about another option?
Let’s increase that percentage rate, right now shall we…
The option more people are starting to explore is self-directing their retirement account.
First, What Is a Self-Directed Retirement Account (SDIRA)?
If you haven’t heard an SDIRA, you aren’t alone. Some attorneys and CPAs still don’t know about it even though SDIRAs have been around for 50 years.
With a self-directed retirement account, you can invest in a number of different assets — land, multifamily real estate, precious metals, and more. I’ve seen people’s returns go from 4% to 15%+ by using this tool, which truly is a game-changer.
Here’s the Step-by-Step Process
First, figure out how much you have in your accounts, where it’s allocated, your returns, and how much you want to self-direct. Then, contact a SDIRA Trust company. My clients have had success with UDirect IRA, Madison Trust, and Equity Trust. There are a number of reputable companies out there. Trust companies can help you understand the process. Even if you aren’t ready to transfer right away, it’s important to get educated.
Once you’ve bridged a connection, the next step would be to complete an application, fund your SDIRA account, and inform the company where you want to invest.
Sometimes, if your retirement account is funded by your W2, you have to wait to leave (ask your plan administrator). Remember, while this is a great tool to get out of traditional low-return investments, all funds have to go back into the IRA it came from – it’s for your retirement after all.
If You Want to Invest in Real Estate, Here are a Few Things to Keep in Mind
There are a number of pros to investing in real estate, including capital gains being tax free, as well as any positive cash flow. However, you cannot take advantage of other tax benefits common in real estate such as depreciation. Also, you can’t invest in your own property (or with direct family) – the investment has to be arms-length.
Here is an example of how someone would use their retirement account to invest in real estate:
The other day I was speaking to a potential investor. She has diligently saved $500,000 in her 401K account. However, it’s currently stagnating in the stock market (4% over the past few years). This women (let’s name her Michelle) could take a portion or all of these funds, and using a Trust company, move them into an SDIRA and invest it in multifamily real estate deals. With these type of opportunities, the returns are fixed (avoiding the stock market rollercoaster).
Here is an Example of Returns on $100,000
Continuing the example above, on a 5-year term, Michelle would earn 6.7% quarterly in cash-flow, plus after five years when the multifamily property is sold, she’ll receive a share of the profits. So, on $100,000, she’ll earn $90,000 total (cash flow plus share of profits).
As per the SDIRA regulations, the cash flow and profit must be rolled back into her retirement account. However, many are happy with both the return percentage and the stability of having a fixed-rate investment.
In Summary
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Self-directed retirement accounts (SDIRAs) allow investment in alternative assets like real estate.
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SDIRAs have been around for 50 years and can yield higher returns.
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To start with SDIRAs, assess your existing accounts, contact an SDIRA Trust company, complete an application, and fund the account while considering investment restrictions.
Sarah Miskelly
Sarah Miskelly, a Toronto native, mom of 2, and full-time real estate investor, had a modest upbringing in a 2-bedroom apartment with her single mom. Her life changed at 3 when she met her dad, a property investor. After his sudden passing at 16, she took charge of his property portfolio. At 24, Sarah became the Top Agent Under 30 at Keller Williams Toronto, selling $55M in real estate, while building her own global property portfolio. Ready to start a family, she gave up her $400K income, able to sustain her lifestyle due to passive income from real estate. Now, through Hylee Capital, her real estate investment firm, Sarah empowers women to enter real estate, generate passive income, and bridge the wealth gap one step at a time.
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