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Become a Millionaire by Investing with Your IRA Account

Become a Millionaire by Investing with Your IRA Account

Your IRA (Individual Retirement Account) is a great vehicle to use in your quest to become a millionaire. You simply open one up at your bank and transfer some money into the account and you’re done. Right? Wrong! The first sentence is correct – the IRA is a great way to become a millionaire. But the second sentence is flat out wrong. So how do you do it?

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First of all, think of your IRA as a vehicle. You put money into the vehicle but it is still just sitting in your driveway. To put your metaphorical transmission into drive (and hopefully over-drive) you need to purchase investments with the money in your vehicle.

With standard IRAs, your investment options are usually restricted to securities such as stocks, bonds and mutual funds. That means if you’re looking to branch out with more novel choices, such as real estate, a Self-Directed IRA is your ticket.

There are also different types of IRAs – standard and Roth – that have different features that you need to understand so as to take advantage of what they offer. There are different rules for each and we recommend that you speak with a qualified financial advisor prior to beginning your journey to $1,000,000.00

In a nutshell your contribution limit to a Roth IRA is determined by your earned income, and those contributions are made with after tax dollars. This means that you do not get a tax deduction in the year of contribution but any monies you withdraw are tax free.

On the other hand, your contribution limit to a standard IRA is not dependent upon your earned income and those contributions are made with pre-tax dollars. This means that you DO get a tax deduction in the year you make the contribution. However, your earnings when you withdraw them are taxed. (Hopefully, you will be withdrawing after your retirement and so will be in a lower tax bracket than you are when you were contributing).

Investing with Your IRA Account

To earn a million bucks within your IRA you really need to take advantage of the power of compound interest. It is thought that Albert Einstein once said that compound interest is the 8th wonder of the world. In short, compound interest is earning interest on your interest.

Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

Let’s take a closer look at compounding: Your contribution limit to an IRA in 2020 is $6,000 (or $7,000 if you are over 50 years old).

Let’s assume a yearly contribution of $6,000:

Self-directed IRA A Yearly Contribution of $6,000 USD

It seems pretty clear that for you to reach the magical $1,000,000.00 in your IRA you need both time and a good rate of interest on your investments. The more time you have the less your interest rate needs to be. On the other hand, if you have started later or are just impatient then you need a higher rate of interest.

For the last 20 years the S&P500 stock market return has been 5.9%

So how do you beat that 6% rate of return over time? Since in a traditional IRA you are stuck with financial instruments like stocks, bonds and mutual funds you need to open up a Self-Directed IRA so that you have access to a broader array of investment choices.

One of the very best things to invest in within your self-directed IRA is real estate.

One of the very best things to invest in within your self-directed IRA is real estate.

Average annual returns in long-term real estate investing vary by the area of concentration in the sector. Average 20-year returns in the commercial real estate […] outperform the S&P 500 Index, running at around 9.5%. Residential and diversified real estate investments do a bit better, averaging 10.6%. Real estate investment trusts (REITS) perform best, with an average annual return of 11.8%.

These numbers are all based on USA real estate. If you look around and do your due diligence you can find some companies that are offering that target 15% or more return on investment.

In conclusion then your IRA can be a fantastic way to take advantage of taxation legislation and earn your way to $1,000,000.00. You need to be aware of the specific rules of the different types of IRAs and your best bet is a self-directed IRA so that you can purchase alternative high yield investments. Best of luck and always do your due diligence, it takes time but you will never regret it.

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