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This week I want to hit on the self-directed IRA.
What do you think about finding the higher-yield assets for your retirement account?
What about a checkbook LLC or a blocker corporation to supersize your account?
Why? We all want more money for ourselves and family in retirement.
This is one of the most powerful tools to use for investing for deferring or eliminating taxes.
I first heard about this in my twenties. Why don’t they teach this in schools?
Maybe they don’t want you to be above the average.
Over the last decade, I have used IRAs to invest in real estate assets and crypto.
There is a reason why one of the best all-time investors has billions in his ROTH IRA.
While these numbers seem out of reach, implement their strategies on a small scale.
So let’s dive in.
A Self-Directed IRA (SDIRA) allows for investments in a wide range of alternative assets not available in traditional IRAs, with the account holder managing investments directly.
SDIRAs are available as traditional (tax-deductible) and Roth (tax-free withdrawals) IRAs.
They offer a tax advantage and allow for control over investment choices without incurring management fees.
Everyone, including minor kids who have earned income, should start early.
Parents should hire their kids for reasonable pay so they can earn income.
Starting at a young age allows the power of compound interest, and your chances of being a millionaire drastically increase.
If you're a young adult, this is a great time to invest in alternative assets to increase your IRA.
It is a great time to assemble a big deal like the guys in the resources.
Now if you are older and approaching retirement age or are there.
This, again, is a great time because you will be able to take tax-free withdrawals from your ROTH at 59.5
As long as your account has been open for over five years.
So why wouldn’t you use a ROTH to invest?
There are many custodians out there who can manage your account.
They all have similar fee structures and services.
Some also offer the checkbook LLC. This allows you to manage your investments directly from an LLC your IRA owns.
Quest Trust, CamaPlan, and Directed IRA are great custodians.
You can invest in most assets that produce capital gain and interest income.
Some of the most popular investments are hard money loans, real estate, cryptocurrency, private equity (companies), and venture capital.
These alternatives are found in private markets, not your typical brokerage account.
These investments need to be passive in nature. Can’t invest in an operating company you're managing actively.
Stay away from prohibited transactions.
A blocker corporation is one of the best strategies to use with an IRA if leverage is used or ordinary income is generated from business activities.
Using a UBIT blocker corporation for an IRA can significantly mitigate tax burdens associated with Unrelated Business Income Tax (UBIT) on activities like house flipping or investing in operating businesses.
The entity uses nonrecourse leverage from third-party lenders to leverage their transactions and eliminate UBIT.
This strategy involves placing a corporation taxed as a C corporation between the IRA and its business activities, thereby reducing the effective tax rate on profits from potentially 37% to 21%.
This makes certain investments more profitable within an IRA by lowering the tax impact and simplifying tax reporting and compliance.
Remember if you use leverage in any deals or generate ordinary income without a blocker, you are required to pay taxes and file a 990-T with the IRS.
Mitt Romney grew his IRA to $100 million by leveraging his expertise in buying undervalued companies, turning them around, or selling their valuable assets for significant profits.
This was achieved through a partnership structure, utilizing an obscure tax rule that initially values future partnership profits at nearly zero.
By investing a small amount from his IRA into the future profits of these partnerships, the value of his investments skyrocketed, all within the legal framework and tax advantages of self-directed IRAs.
While complex and involving careful management of IRS rules and leverage, this strategy showcases the potential of self-directed IRAs for significant tax-free growth.
Peter Thiel, the billionaire co-founder of PayPal, capitalized on a landmark court case, Swanson v. Commissioner, allowing self-directed Roth IRAs to invest in private ventures.
By placing 1.7 million shares of PayPal into his Roth IRA at $0.001 per share in 1999, Thiel set the stage for tax-free growth.
PayPal's success and subsequent investments, notably a $500,000 stake in Facebook, massively increased his Roth IRA's value to over $5 billion, all growing tax-free due to the Roth IRA's tax-exempt status.
Ted Weschler, now a Berkshire Hathaway executive, began building his IRA in 1984 with annual contributions and employer matches.
Through diligent investments in publicly traded securities, Weschler achieved an extraordinary compound annual growth rate (CAGR) of over 30%, growing his IRA from $70,000 in 1989 to $264 million by 2018.
In 2012, he demonstrated his astute investment skills by converting his traditional IRA to a Roth IRA, for which he paid $28 million in taxes.
This strategic move ensured long-term tax-free growth and set an excellent example of investment know-how that is accessible to the average investor.
Max R. Levchin, a key figure behind Yelp and PayPal, leveraged his Roth IRA to sell 3.1 million Yelp shares for $10.1 million
He also enjoyed tax-free profits thanks to the Roth IRA's tax-exempt status for earnings withdrawn after age 59 1/2.
With an additional 3.9 million shares of Yelp in his Roth, valued at around $95 million, Levchin's Roth IRA represents a significant tax-free asset.
Furthermore, the potential inclusion of stocks from his venture, Slide, sold to Google for $182 million, underscores the Roth IRA's role in building a substantial, tax-efficient estate.
With time and action, everyone can become rich in their retirement years.
Your chances will increase if you swing the bat and invest in high-yielding deals.
There are many nuances to investing with IRAs and prohibited transactions.
Everyone can copy those with mega accounts, by starting small and having decades ahead of you.
Hire a lawyer to help you structure your deals and stay compliant.
Start today, even with 5k, and get the ball rolling.
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