Many people don’t know what is an IRA. People invest their money in an IRA (individual retirement account) and do not really look into all the problems associated with them.
What is an IRA?
IRA’s are a hands off approach to investing, basically giving your money to someone else to manage and hope the stock market goes up and increase the value of the shares you purchased.
The basic investment your IRA purchases are stocks of many different companies. The $ value of your IRA goes up and down with the performance of all the combined stocks in the group of stocks. If the stock market goes up or down, usually the group will follow accordingly. Just like the idea that the rising tide raises all ships.
There are many problems with investing in the stock market as opposed to real estate or online businesses but IRA’s have their own issues.
Similarly to the problems with 401k, IRA’s do have different issues that you should be aware of. I personally do not invest in IRA’s and would recommend others to think twice before they do.
I have found that passive income ideas like online businesses and rental properties are the best way to earn passive income. I have found 15 reasons why I invest in rental properties and why I invest all my money from online businesses to purchase more rental properties.
Here are the 7 Traps in your IRA you must watch out for:
1. Low rates of returned compared to real estate
The best mutual funds return about 8-10% per year. That means that if you invest $5,000 in a mutual fund you may be able to have your investment grow by $200-$500 per year. Real estate on the other hand can return sometimes 200%-300% returns in the first year if buy it right and rent it out. I outlined how you can earn money 5 different ways AND how it is possible to get a 780% return in 1 year on your money. Don’t settle for 3%-6% return on your money.
2. Only Earned Income Can Be Contributed
If you have a J.O.B. (Just Over Broke) you are able to contribute into an IRA. The IRS states you must earn an income from taxable compensation in order to contribute. These include wages, salaries, tips, bonuses, commissions, professional fees and self-employment income. If you invest in passive income ideas with monthly cash flow through real estate, earn dividends, or receive interest, you are excluded from contributing to an IRA.
There is a reason why they are called an Individual Retirement Account. It was created by the rich to keep you working until you are not able to work any more because you reached the age they don’t feel you can work any more. Sorry, I digressed there a bit. Seriously though, retirement is an American idea that is not normal. People don’t usually retire and have someone give them money.
The way I believe it should be is that YOU create your “retirement” and become independent from anyone telling you when you can retire. Why not retire now? Check out how I quit my job at 36 years old with passive income ideas.
3. The more you make the less you can contribute because of income limits
If you earn more than $118,000 a year as a married couple you, are cut off from contributing to an IRA because of the IRS income levels put you out of range. If you have a Roth IRA, your married income cannot surpass $193,000 or your contributions will be cut off. In real estate, the more money you make, the more properties you can buy. The more properties you buy, the more you will make!
4. Tax Risk with Before and After-Tax Contributions
Depending on which you prefer, IRA or Roth IRA, your contributions will not be deducted from your income taxes. A Roth IRA is invested with after tax dollars and you cannot take a tax deduction for your contributions when you file your federal income tax return. Depending on what your tax bracket is now, or when you retire, you could be stuck with more taxes than you originally expected.
Real estate rental properties give you the best tax advantages. Because owning rental properties is seen by the IRS as a business, you get many tax deductions. These deductions makes it look like your passive income is lower and because of that, you save money.
- Depreciation – The IRS lets you deduct the value of the property over 27.5 years. Depreciation is looked at as an expense, but no money was ever spent. You purchased the property, which makes you money and still has its actual value, and the IRS lets you deduct part of the value of the property over 27.5 years.
- Another great thing about depreciation is that if you give the property to your children, they get to start the entire depreciation cycle of 27.5 years all over again at the current market value!
- Operating expenses
- Mortgage interest, insurance, repairs, advertising, Property Manager, utilities, yard maintenance, losses, etc.
- Ownership expenses
- Property taxes, mileage, business cell phone, professional fees for accountants and lawyers, travel, convention attendance, business education, home office, etc.
5. Giving Money to Heirs
A traditional IRA requires you withdraw your earnings at at 70 ½ which may not work for you if you have other plans. If you do not need your money but want to let it keep growing without incurring fees and charges by leaving it in the IRA, you are not able to. You must withdraw the money AND be hit with taxes on the money you withdraw. You can take you earnings and find another investment vehicle like real estate but you have already lost from the taxes paid when you took your money out.
6. Substantial Holding Period
Because the Roth IRA is funded with after-tax earnings, when you withdraw your money it is tax free because the original money was already taxed before it went into the account. There is however an aging process before your money invested can be qualified for the non-tax payout. You must be 59 ½ years old or disabled. The Roth IRA must be maintained for at a minimum of 5 years before it qualifies for the tax free withdrawal. You will be hit with a penalty if you take the earnings before they are qualified and be considered taxed as ordinary income and a 10% penalty.
With rental properties, you only have to hold onto them until you want to sell them. There are ways to continually differ your taxes indefinitely. This is called a 1031 Exchange. For example, you buy a single family home, sell it 10 years later, and make $50,000. Use a 1031 exchange to buy a more expensive property like another single family home that makes more income or even an apartment building! Do all this without paying any taxes today and defer them to a much later date if you decide to cash out completely.
7. Lack of Access to Your Money
An IRA is intended as retirement savings and the IRS will hit you with a 10% penalty if you withdraw it before the age designated by the IRS. For a Roth IRA, 59 ½ and traditional IRA is 70 ½. You must wait until the proper age to touch your money without a penalty. The only other reasons for pulling out the money is for a first time home purchase or if you become disabled.
Instead of waiting until you are retirement age, why not get the money now? I know we all could use some more money in our pockets every month AND that most of us do not want to wait until 70 years old to spend that money. Invest in rental properties to get cash flow every month for the rent profits.
Passive income ideas that the rich stay away from are any investments that:
1. Does not allow them to access your money at any given time.
2. Does not allow them to control your money how they see fit.
3. Charges a penalty for not following the “rules”.
4. Keeps them from enjoying their money until many years in the future.
5. Allows the government, through the IRS, to dictate the terms of their investment.
Let me know what you think! Submit a comment below!
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