Tuesday, March 14, 2017, AM | Leave Comment
There are a number of different tax benefits for both traditional and Roth IRA retirement accounts.
Obviously, with a Roth plan, you make contributions after taxes have been withdrawn, but none are due when you withdraw from your account. Because of these tax benefits, Roth IRA’s are generally considered an indispensable part of diversified investment portfolios.
The only drawback to Roth IRA’s is that the IRS puts a cap on annual contributions to them at $6,000 (depending on factors like age and marital status.)
There are, however, two ways that investors can maximize the annual rate of return on their Roth IRA’s.
Increase Your Involvement
Many times mutual fund managers miss out on financial boons by playing it too safe, while other times they play a little too fast and loose with their client’s investments in hopes of gaining large returns.
A self-managed IRA allows you to take the right level of risk for you and capitalize on the associated rewards.
By self-managing your Roth IRA you can also invest in a broader range of assets, such as business, precious metals, real estate and securities. You can also use your funds to invest in things that matter to you, such as providing start-up capital for a business.
Funding a start-up certainly comes with it’s own risks, but can also provide far greater rewards than more conservatively managed accounts.
Obviously, it requires a great deal more work to manage your own accounts, which may make you question whether all the additional effort is really worth it.
However, managing your own money helps you understand your investments better and helps you make more informed financial decisions overall.
One hugely important point to keep in mind, however, is that the IRS will be closely monitoring your self-managed Roth IRA.
There are a number of rules and regulations you must adhere to when investing self-managed IRA funds. Some investments, such as real estate holdings or franchises, require an approved custodian to track profits and losses and report transactions to the IRS.
In addition, if you make real estate purchases with your self-managed IRA, you may not be involved in handing the asset in any way. This includes managing the property in any way, which includes collecting rent or maintaining the resident.
Again, a trustee or custodian must be appointed for these transactions.
Here’s what you need to know about using a custodian
Custodial costs automatically decrease investment capital, which can diminish long-term returns. When it comes to asset management, knowledge is power and what you don’t know WILL hurt you.
Do your homework and follow these tips to reduce costs:
Find a custodian with a history of handling the kind of investment you plan to pursue.
Make sure you understand all of the fees associated with the type of investment you are making before you sign a contract. If you are making a real estate investment, be sure you know in advance how the custodian handles issues like collecting rent, managing a property and what actions they might take if a tenant fails to pay rent.
Using a custodian can increase the costs of self-managing your Roth IRA, which leads to the second point.
Decrease Investment Costs
Once you decide to self-manage your Roth IRA you need to look at decreasing your brokerage and transaction fees.
Since you no longer have to pay a fund manager to manage your account, this will already begin saving you money over the long run.
You can also lower your transaction fees on purchases in normal asset classes such as stocks and bonds with low cost options like E-Trade or other companies like this that can guide you in opening and maintaining your accounts but are significantly cheaper than traditional banks or private brokerages.
Hidden costs can eat up small portions of your principle, which can have a huge impact on your returns over time. Do some research to avoid these fees.
While it may seem like a lot of additional and unnecessary work, self-managing your Roth IRA allows you to cut significant costs while maximizing returns. Doing so can also give you a plush, diversified nest egg to keep you comfortable in retirement.
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