Self-Directed IRA Investing – Tax Deferred or Tax Free

Tax deferred investing is great – tax free investing is greater!

In this article we will show you the amazing impact of compound interest.

Self-Directed IRA Account

A self-directed “IRA Account” is an individual retirement account that provides tax advantages for retirement savings. The self-directed “IRA” account is administered by a “custodian” or “administrator” who does not act as an investment advisor. The account owner makes all investment decisions and is completely responsible for the outcomes of the investments. This is an important fact.

The two main types of self-directed IRAs that we will discuss here are the “Traditional IRA” and the “Roth IRA.” Both offer tax-free growth. Their individual rules, regulations and tax advantages are detailed and specific. Those legal rules and regulations are not a subject of this article.

The purpose of this article is to explain and focus on the long-term financial benefits that result from tax deferred and tax fee investing. Additionally, one particular type of investment vehicle will be used to demonstrate these benefits-the Promissory Note.

The Benefit of Using a Promissory Note to Generate Cash-Flow

The Promissory Note is ideally suited for use in a high cash-flow, tax deferred, or tax free investing situation. If properly structured, the Promissory Note provides consistent monthly cash income that can be compounded over many years. The compounding effect of money over time produces excellent long-term results.

Tax Deferred or Tax Free Compounding Interest

As an example let’s assume the following:

I.$50,000.00 promissory note, payable monthly, interest only, at 7.0% annual interest, balloon balance of $50,000.00 due after 84 months-7 years.

1. A taxable account at a 30.0% Income Tax Rate: $291.67 monthly interest income X 12 months = $3,500.00 annually, less Income Tax of $1,050.00 =$2,450.00 available to reinvest annually at 7.0%.
2. $2,450.0 invested annually for the next six years (six…

Read More…. by Lawrence Tepper

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