First, let me share the fabulous news about “Retirement Accounts” then the bad news that I have to tell all the people who ask me about investment choices in a Retirement Account.
Tax-free Versus Tax-deferred
Retirement Accounts – 401(k)s, (403(b)s, IRAs and others – have wonderful tax advantages. Some allow you to put pre-tax money into an account, which then grows tax-free for years or evendecades until you withdraw it. When you withdraw it, you pay tax on the withdrawal. So they aren’t “tax-free”, they’re “tax-deferred.”
Others, called Roth accounts, work differently. You put after-tax money in them (in other words, you have paid income tax and other taxes like unemployment, etc. on the income before you deposit the money into the account). The money grows tax-free. That is, you do not pay income tax each year on the gains in the account. Then, when you withdraw the money, it’s all tax-free: both the after-tax deposits you made and the gains on those after-tax deposits which you never did (and never will) pay any tax on.
These are pretty compelling reasons for putting money into Retirement Accounts.
Estate Planning with Retirement Accounts
From an estate planning perspective, Retirement Accounts provide some attractive planning options. You can pass Retirement Accounts on to younger generations in ways that allow your beneficiaries to defer paying taxes on the funds in the accounts for, perhaps, decades as the inherited Retirement Accounts grow tax-free (for Roths) or tax-deferred (for non-Roths). When we’re talking about an inheritance by a prudent 20-year old or, even more securely, a trustee for a 20-year old, the inherited Retirement Account could be worth two or three or ten times its original value when inherited.
Types of Retirement Account Investments
Now, there is a question I often get that I must answer here in a way that you may not like. Unlike other kinds of accounts, most Retirement Account custodians only offer paper investments as options for investment. That leaves out entire classes of investment such as real estate, tax liens and small businesses. This article ends here if you own a 401(k) or 401(3)b and you can’t roll it over into an IRA.
If you have an IRA, or the option to rollover into an IRA, there are a few “self-directed IRA” custodians (a “custodian” is the company that holds your money and complies with IRS requirements for IRA reporting and – most importantly – gives it back to you when you want it) who will permit you to invest in any of those non-traditional classes of investment.
Protect Yourself From Danger
A web search will turn up a few. Because they are not well-known companies, I cannot tell you about any experiences our clients have had with any of them. But please do read this warning from The North American Securities Administrators Association Self-Directed IRA Fraud. I also encourage you to check out this alert from the Securities and Exchange Commission (SEC): Self-Directed IRAs and the Risk of Fraud It’s a pretty murky area so keep a sharp eye out and tread carefully. You don’t want to lose everything because you tried for a few extra points on your return.
To maximize the tax-free or tax-deferred growth of your Retirement Accounts, please give us a call at (303) 800-1588 to schedule a no obligation consultation. We’d love to help!
– Diedre Braverman