Entrust Learning Center > Keyword: retirement > Building Your Nest Egg with a Self-Directed Plan

Building Your Nest Egg with a Self-Directed Plan

The only way individual Americans have of increasing personal purchasing power beyond the level of inflation, and the only way we have of setting aside sufficient funds for a comfortable retirement, is to do it ourselves.

The only way individual Americans have of increasing personal purchasing power beyond the level of inflation, and the only way we have of setting aside sufficient funds for a comfortable retirement, is to do it ourselves.

Nurturing the growth of a retirement nest egg that meets retirement needs isn't easy. We're facing ever-increasing pressures from local and federal governments to hand over more income. Far more of our dollars will go to pay the interest on our $4.58 trillion national debt and to a bloated government bureaucracy than will go to making life better for the working people who contribute the funds in the first place.

Here are the facts that really matter:

Since 1973, the average American's purchasing power has declined by 11 percent in real terms. Effective federal income and capital gains taxes now range between 28 percent and 38 percent - and state taxes, such as California's nine percent - increase the burden on individual taxpayers. To break even in today's economic climate, the average American must get a 10 percent raise each year. And for our investments to increase in value, we must make slightly more than 10 percent a year on each dollar we invest.

These facts make one thing crystal clear. The only way individual Americans have of increasing personal purchasing power beyond the level of inflation, and the only way we have of setting aside sufficient funds for a comfortable retirement, is to do it ourselves.

Tools Available

Fortunately, the same government we criticize has given us the tools we need to make comfortable retirement possible. Surprisingly, one of the most effective tools is also one of the least well known. That tool: self-directed employee benefit plans. Whether it's a profit sharing plan, an IRA (Individual Retirement Account), or a SEP-IRA (a Self-directed Employer Plan-IRA), a self-directed employee benefit plan that offers maximum investment flexibility to the investor, can literally be worth its weight in gold... or real estate, or limited partnerships, or whatever allowable investments the individual chooses to include in his or her portfolio.

Restrictions

There are a few restrictions on what the individual may choose to invest in through a self-directed plan. Certain types of gold and silver, for example, may he held in an IRA account, but not in a profit sharing plan account. Collectibles may be held only through investments in limited partnerships established for that purpose. And, there's an absolute prohibition against self-sealing or dealing with any member of your family, other than siblings, in making investments through a self-directed plan. Those are most of the limitations.

IRS Approved

Beyond that, if a trustee offers self-directed employee benefit plans that are approved by the IRS for a full range of investment options, any legal investment may be made through a self-directed plan. And, every penny earned in such a plan is reinvested, accruing tax-free until the account holder begins withdrawing funds from the account. You can make all investment decisions for yourself.

Investment Options

Interested in acquiring some shares of closed corporate stock? You can. Buying discounted notes is possible, too. Unsecured loans may be made using funds from a self-directed retirement account. Limited partnership interests can be acquired by using funds from a self-directed retirement account. And, of course, there are always the more conventional investments: stocks, bonds, CDs, and the like. Many self-directed account holders turn to these options as interim investments, using them to realize better-than-passbook earnings while they seek out the next major investment.

Real Estate's an Option, Too

Interested in real estate? Real Estate investments through self-directed employee benefit plans can be just as varied as the more traditional real estate transaction using non-tax-sheltered dollars. And you choose the property yourself.

Real estate investments through self-directed employee plans can be just as varied as the more traditional real estate transaction using non-tax-sheltered dollars.

For example:
Your self-directed plan can buy, sell or exchange real estate- leveraged or unleveraged, improved or unimproved. You choose the property, you decide on the broker, the escrow agent, the lender, and the property manger, if one is needed. And, you direct the administrator of your self-directed account to handle the transaction.

Another option:

A real estate agent represents a client who needs more money to make the down payment on a home. The agent knows another client who has retirement funds he or she wants to invest. The agent puts the two parties' together and one-client loans the other client the needed funds from his or her self-directed retirement account, after establishing payment terms and interest rates. Or, a group of investors may want to participate in a major property purchase. They can do so, by using funds from their individual self-directed accounts to buy the property or lend money to others that wish to buy.

Self-directed plans can also invest in raw land, which is then subdivided and resold. These plans can buy and rehabilitate property and resell it. They can be used for the leveraged purchase and subsequent resale of a home. They can fund swing loans. Quite simply, if a real estate transaction can be carried out and, if it doesn't involve self-dealing or dealing with one's relatives, it can be financed with funds from a self-directed employee benefit plan.

But the best thing about any investment option available to holders of self-directed retirement accounts is that all profits realized on investments made through the accounts are fully tax-deferred until the account holder begins to take distributions from the account. That's usually not until age 59½, and not necessary until age 70½.

Truly for Everyone

Self-directed employee benefit plans can truly benefit all investors - the self-employed as well as those working for others, married people and those who are single, people just starting out in their careers and executives earning a six-figure income. The variety of plans, IRA, and SEP-IRAs, make it possible for anyone to take part in at least one type of plan. Those who already have begun saving through an IRA or SEP-IRA account, in all likelihood, one whose investment options are more restrictive than a fully self-directed plan, may roll over or transfer their funds to a plan administrator who offers IRAs/SEP-IRAs which allow a full range of investment options. And, for those who have several retirement accounts established, they can be used for one larger investment, for maximum economic impact.

Choosing the Right Account

To determine which of type of account is right for the individual investor, two questions must be answered:

• How much money does the person want to save each year ?

• Is the person an employee, employer, or sole proprietor?

Employees have just one choice: the IRA. They may invest up to per year, and depending on their income levels and their or their spouse's participation in an employer-sponsored pension plan, the contribution may or may not be tax-deductible. But once the funds are in the IRA, their earnings are tax-deferred until the account-holder begins to take distributions from the account. So it's still a tax benefit worth pursuing.

Employers and sole proprietors may use IRAs as investment vehicles, too, but they also have the option of opening profit sharing plans, SEP-IRAs, or Money Purchase Pension Plans. Profit-sharing plans and SEP-IRAs allow contributions of an individual's net earned income.

Profit Sharing plans also allow employers/employees to invest.

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