By Brigitte Remy-Yee
Congratulations. You made it past Tax Day. That may be a bigger accomplishment than you realize; Albert Einstein himself once complained to his accountant, “The hardest thing in the world to understand is the income tax.”
Now that you have completed the stressful and time-consuming task of telling the IRS about your recent financial history, it is a good time to turn your focus to your financial future, and even retirement.
A large percentage of Americans in the workforce have inadequate retirement savings. In fact, according to the Economic Policy Institute, nearly half of families in America do not have retirement savings at all. Additionally, a quarter of those Americans are already over the age of 45. One great place to start is with an IRA. Opening and funding an Individual Retirement Account (IRA), is fast, simple, and can help you start growing your retirement savings almost immediately.
Why Open Your IRA Now?
One of the primary benefits of IRAs is the tax advantages they offer. When you save money for retirement in a traditional IRA, you can deduct your contributions every year from your income tax bill. Or, if you choose a Roth IRA, you can contribute after-tax dollars to your account each year, and although those contributions are not deductible from your income, your investments can grow in your account tax-free and you will not face any tax bill when you withdraw the money during your retirement years.
In other words, the tax advantages alone might be a compelling enough reason for you to open an IRA as soon as possible, so you can begin enjoying the tax benefits by next year (and every year after for the rest of your career).
There is, however, another equally compelling reason to start saving in an IRA now: The benefit of compounding. As Business Insider explains it, “compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself.” Obviously, the longer you are able to invest in your retirement account, the more time that account can give you the benefit of compounding.
In a report illustrating the power of compound interest, JP Morgan Asset Management used three hypothetical investors: Susan, Bill, and Chris. Each invested the same amount in their retirement accounts every year ($5,000), and each earned the same rate of return. But Susan, who only made annual contributions for 10 years, amassed more wealth than Bill, even though he made annual contributions for 30 years. How is that possible? Compound interest.
Susan began investing when she was 25, while Bill did not start until he was 35. Even though she did not add another dollar to her retirement account after her 35th birthday, that $50,000 Susan invested had another 30 years to compound and grow by the time she reached 65. So even with another 20 years of $5,000 annual contributions, Bill could not catch up with the wealth Susan was accumulating. As for Chris, he, like Susan, started investing at 25, but he continued making annual contributions for the next 40 years. By the time he turned 65, Chris had built a retirement account many times larger than Susan’s.
This is the power of compounding, and why the best time to open your retirement account may be now. Saving early and often, and automatically investing your savings are factors that may lead to a successful retirement when compounded over the long-term.
What is Involved in Opening an IRA?
Most major financial institutions offer IRAs. Opening an account is simple, can be done entirely online, and should take only a few minutes.
You will first need to determine the type of IRA you want to open (traditional, Roth, SEP, etc.) and then find the institution that offers you the investment options within your IRA that appeal to you.
Finally, you will want to fund your account. The institution where you are opening the account will ask where the funds will be coming from: another financial institution, a rollover from another retirement plan, such as a 401(k), or a check which you will be sending.
You will need to make contributions to your IRA each year by the due date of your tax return. In 2018, for example, the contribution deadline was April 17.
As for the minimum amount needed to open an IRA, with many institutions there isn’t one. Of course, you will need money in your account to make any investments. If you open a traditional IRA and want to purchase a single share of Apple stock, for example, you will need a couple hundred dollars in your account, both to buy the stock and to cover any brokerage fees for the trade.
As for maximum contributions to your IRA, as of 2018 the law allows a total IRA contribution for the year of $5,500 (or $6,500 if you are 50 or older). Keep in mind these maximums apply to your total IRA contribution for the year even if you have traditional and Roth IRAs (and yes, you can have both).
How Can I Invest my IRA?
With most types of IRAs, your options may be limited to conventional investment vehicles such as stocks, bonds, mutual funds, and money markets.
You may also want to research the specific investment options available through each of the financial institutions where you are considering opening your IRA. Some offer many more options than others.
The Self-Directed IRA: A Little-Known IRA Offering Big Investment Choice
If you are interested in a more hands-on role in your retirement investments, you might also consider a self-directed IRA. This little-known type of IRA allows you both greater control over managing your investments and potentially more freedom in the types of investments you can make than most other IRAs offer.
With a self-directed IRA, for example, you can invest directly in real estate, precious metals, private businesses, and other types of what the IRS calls “alternative assets,” which you generally cannot invest through conventional IRAs.
One of the most popular investments for self-directed IRA holders is commercial real estate, and one of the most popular ways to invest directly in commercial real estate is through a Real Estate Investment Trust (REIT). REITs can have the objective of appreciation and cash-flow similar to commercial real estate without any of the responsibilities for the day-to-day management of the properties. However, there are risks to investing in REITs including the loss of capital, so it is important to understand any investment before allocating to it.
You can use the funds in your self-directed IRA to purchase equity in non-traded REITs or other types of real estate, and give these investments the opportunity to potentially grow within your IRA. Allocating some of your retirement account to an investment such as a REIT may provide you diversification as well as income that may grow and compound within your IRA over time.
Which Institutions Will Serve as IRA Custodian for Your Non-Traded REITs, and Which Won’t?
It is also important to know that many of the traditional brokerage companies and financial institutions may not serve as custodians for alternative investments such as non-traded REITs.
One example of a company that will serve as the custodian for your self-directed IRA and allow you to invest your account in non-traded REITs is IRA Trust Services. This company, for the record, is RealtyMogul’s preferred custodian and serves as both administrator and trustee for our self-directed IRAs.
To discover how you can invest your self-directed IRA in large-scale commercial properties, managed by experts, read our 5 Steps to Invest Your Retirement Funds in a MOGULREIT.