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For 40 years, The Entrust Group has provided account administration services for self-directed retirement and tax-advantaged plans. Entrust can assist you in purchasing alternative investments with your retirement funds, and administer the buying and selling of assets that are typically unavailable through banks and brokerage firms.

FIRE + Self-Directed IRAs: Heat Up Your Retirement Plan with a Tax-Advantaged Account

FIRE + Self-Directed IRAs: Heat Up Your Retirement Plan with a Tax-Advantaged Account

Estimated reading time: 5 minutes

There are many paths and strategies for retirement. Some people focus more on saving while others focus more on maximizing their earning potential. 

In recent years, there has been a growing retirement movement called FIRE, short for Financial Independence, Retire Early. This movement gathered steam in response to the 1992 best-seller, Your Money or Your Life. It encourages people to look at each of their expenses in terms of the time it takes them to pay for the expense. 

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Financial independence and early retirement planners often work toward saving 70% of their income until they save enough money to transition out of their day job. The FIRE movement recommends calculating your FIRE number, but the common recommendation is to save 25 times your annual expenses. The goal is then to live in retirement on these savings by withdrawing 3-4% per year. 

Some people reach their retirement goals by cutting their expenses drastically and focusing solely on saving. Others take a modified approach, sometimes called FAT FIRE, and save more than average, while still enjoying some more luxuries than strict FIRE. Barista FIRE is the strategy for people who plan to retire with a part-time job, and Coast FIRE is a focus on retirement at a traditional age without needing to continue saving for retirement.  

FIRE is more a mindset than a strict procedure. It is about figuring out how much money is enough for the life you want and understanding how your spending fits with your values. It’s no surprise that during the pandemic, FIRE was spurred on by people reassessing the way that work intersected with their lives. 

Millennials have been particularly enthusiastic about embracing this new way of looking at finances and retirement that turns the standard retirement paradigm on its head. But focusing on saving in order to retire at 55, 45, or even 35, changes the dynamic of retirement planning. 

Because FIRE focuses on early retirement, these investors must take into account that tax-advantaged accounts are only available penalty-free to retirees over 59 ½, with some exceptions. Retirement plans always involve balancing your strategy to meet your goals. Self-directed IRAs can be an important part of retirement planning, even for people looking to retire early. 

 

How Can FIRE Be Paired with an SDIRA? 

If you are pursuing FIRE, you know savings are an important part of the process. For many, they are the bridge to carry you between your early retirement and access to your tax-advantaged accounts. And the earlier that you can invest in your tax-advantaged plan, the more that part of your portfolio can grow to support you in later retirement. 

SDIRAs are unique because they open up the world of alternative investing. Why should you invest like everyone else, when you don’t live like everyone else? Learn how easy it is to set up an SDIRA and get investing now for your future.

 

Chat with an SDIRA Expert

 

 

Pairing a saving strategy with tax-advantaged retirement accounts allows you to leverage your retirement plan. Unlike managed IRAs from a bank or brokerage, SDIRAs allow you to put your money in investments you understand or care about that fit your plan. Whether you want to grow your tax-advantaged retirement accounts with real estate, private equity, or cryptocurrency, an SDIRA lets you invest in much more than stocks and bonds. 

And with an SDIRA, you have the flexibility to choose a traditional or a Roth IRA. Traditional IRAs can be funded with pre-tax income and are tax-deferred accounts, meaning that you pay taxes when you withdraw. You must wait until age 59 ½ to withdraw penalty free from a traditional IRA. 

Roth IRAs, however, are funded with post-tax dollars and are tax-free, meaning that you do not have to pay taxes on the gains when you withdraw them. You cannot withdraw them penalty free until age 59 ½, and you must have had the Roth IRA for more than five years. 

 

When Does an SDIRA Make Sense for Early Retirees? 

If you plan on your tax rate being lower in retirement, a traditional IRA allows you to capitalize on saving pre-tax income and withdrawing it at a lower tax rate later. If you’re self-employed, you can consider a self-directed individual 401(k), which also allows pre-tax contributions. These contributions can provide an additional tax advantage by also lowering your current taxable income. 

While there is a penalty for withdrawing your gains in a Roth IRA, keep in mind that all your contributions to a Roth IRA can be withdrawn penalty-free before 59 ½. This allows you to access your Roth IRA savings earlier in your retirement. 

Saving for retirement is all about strategy. Whether you decide to save more now and work to retire early or you want to focus on a more conventional retirement timeline, investments are the backbone of any retirement plan. 

Talking to a financial advisor can often help you learn more about how tax-advantaged accounts work. They can also show you ways you can potentially lower your tax burden now and provide tax-free or tax-deferred income later in life. The steps you take now have the potential to pay dividends later. 

 

Retire Early with the Help of an SDIRA

If you haven’t considered self-directed retirement accounts like an SDIRA or an individual 401(k), here are three great reasons self-direction might be the perfect complement to an early retirement strategy, whether you follow FIRE or you just want to leave the work world behind. 

  1. Self-direction lets you invest in your future with a wide variety of alternative assets that go beyond stocks and bonds. 
  2. Traditional SDIRAs and 401(k)s can be funded with pre-tax dollars and gains can be withdrawn tax-free after age 59 ½.
  3. Self-directed retirement accounts let you grow your retirement in tax-advantaged accounts that you can pair with savings for more resources in your retirement years. 

Join us at our upcoming webinar if you'd like to learn about more ways to incorporate early retirement strategies and SDIRAs into your retirement plans.

 

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