Putting your IRA account to work

October 25, 20166 min read
Putting your IRA account to work
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If you’ve spent any time looking at the plight of America’s seniors, or pondered how you’ll fund your own golden years, you probably gathered that trying subsist on Social Security payments alone is not an optimal retirement plan.

So how do you make your money work for you? How do you make sure you get gains from the savings that you put into retirement over time?

A retirement account is a way to invest pre-tax income to get tax-deferred growth. Instead of having your earnings reduced by income tax, the IRS allows people to use retirement accounts to allow that money to grow tax-free.

There are a number of available retirement account options, each with its separate advantages and restrictions. It is important to understand the differences between the different options.

Post-taxRoth IRARoth 401(k)

Retirement accounts can be individual (IRA, Roth IRA) or employer-sponsored (401(k), Roth 401(k)). They can also differ on how they are taxed – before contribution (post-tax) or when withdrawn (tax-deferred). There are also a number of lesser-known retirement accounts like 403b, SEP, and TSP.

A 401(k) is an employer-sponsored plan. Employers sometimes match funds, setting different limits or restrictions for how employees can grow their savings through investments. When someone leaves a job, a 401(k) can usually be rolled over into a traditional IRA.

Some investors choose to mix and match employer-sponsored and individual retirement accounts to maximize their tax-free earnings and benefits.

If an employer offers to match 401(k) contributions, individuals should generally contribute enough to get the full match. After exhausted, they may choose to contribute additional money to their 401(k), or choose to contribute to an IRA. The primary driving points in that decision should be the management fees and the individual’s income. Those whose high income does not qualify them for the benefits of an IRA generally choose to max out their 401(k) contribution before contributing to an IRA account. Those who are eligible for IRA benefits are better off contributing enough to get the employer match on a 401(k), then starting to contribute to an IRA.

It is important to keep track of restrictions and contribution rules to each account. Find out more about employer-sponsored and individual retirement plans here.


Types of IRAs

IRAs are retirement accounts typically used by individuals who don’t have a 401(k) or employer-backed plan. Although IRAs for self-employed people and others don’t get matching funds from employers, their primary advantage is that they often have more freedom in terms of investment options.

There are two different types of IRAs that are taxed differently—a regular traditional IRA, as mentioned above, has taxes taken out when money is withdrawn in retirement, or whenever the account holder dips into it. A Roth IRA, on the other hand, is taxed as the individual contributes, so that they can take out the gains without further taxation.

Choosing a retirement account

When it’s time to choose an IRA, investors can look at things like their age, employment status, and appetite for risk. Those who are employed by a big company with matching funds may choose their 401(k)s to be the primary vehicle. Investors who have been self-employed most of their lives might choose the traditional IRA. As an individual nears retirement and has a better idea about their future earnings, they might choose to contribute to a Roth IRA to have their money taxed upfront. This page from Investopedia goes into the details of the differences between Roth and traditional IRAs.

Many investors are choosing self-directed IRAs because they give them more freedom in the types of investments they can add to their portfolios.

Self-directed IRAs

Many conventional IRAs are managed by an “IRA custodian” such as a brokerage who can set restrictions on what types of equities, funds or other products the IRA can invest in. A different type of IRA account, called a self-directed IRA, is truly an open book when it comes to investment opportunities.

With a self-directed IRA, there are very few limits, leaving investors free to try to find options that are less mainstream.


Where to invest your IRA account

For those with traditional IRAs, many of the questions on where to invest are answered for them. An employer or custodian may only allow them to trade in certain stocks and equities or in various types of funds or bonds, with occasional opportunities in a real estate investment trust or another type of fund.

Self-directed IRAs offer a wider range of investment options, including alternative investments, which can be a great way to diversify an investor’s portfolio. Read more about portfolio diversification here.

For instance, instead of just buying into a single real estate investment trust or REIT, account holders can invest in baskets of properties, property liens, or other kinds of real estate investment vehicles. They may put money into an unusual piece of real estate, such as a vacant lot, a small parcel of land, or a dormant commercial property with future value.

The investment choices don’t end there. More investors are making choices that fall outside of the traditional spectrum. Instead of individual stocks, IRA holders might invest in different kinds of commodities and assets that are not on any traditional market exchange.

There’s also the potential to use alternative investments to get great returns—and in some cases, investors can earn high yields without taking on a higher risk of principal loss.

Traditional investment philosophy holds that risk always affects return—the more risk you take, the more potential there is for a higher return. But the equation can prove to be too simplistic with alternative investments. A major benefit of these more unique types of investments is that savvy investors can make their money work in more sophisticated ways.

Alternative investments are investments that don’t fit a particular easy label or category. “Alternatives” is an umbrella term that covers different types of alternative asset classes, from a high-end art collection to real estate, to litigation finance, and clean energy.

In many cases, alternative investments have risks around timing and payout terms. For example, payments from a litigation finance opportunity may not follow a specific amortization schedule but will be event-based, depending on when the cases in the portfolio settle. This risk, though potentially inconvenient for an investor, does not directly affect their chance of principal loss. Read more about the risks of alternative investments here.

Alternative investments may offer investors the chance to invest more wisely and creatively for a chance to get more gain.

At Yieldstreet, we are dedicated to helping investors find new value. Ask us how to pursue Yieldstreet’s alternative investments with self-directed IRAs.

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