To the typical worker in corporate America, words like 401k or IRA are common place when discussing retirement benefits. Many people however are unaware as to how these retirement accounts work or what their options are for investing. Today we will clarify some of this discussion and show what is truly allowed with retirement accounts.
401k, IRA, Roth and Custodians
Many individuals have a hard time understanding the differences between all these terms. A 401k is a type of tax advantaged retirement account that is given to the employee of a company as a benefit. The 401k is managed for the company by a custodian which is the name of the company that you see when you log into your company's 401k portal. A 401k is nominally a pre-tax account which means you put your money in before paying taxes on it and then after it grows tax free, you would pay taxes while taking money out later on. However, you can also contribute to a 401k or IRA with a Roth option which simply means you pay taxes up front, the money then grows tax free and you can eventually take it out after retirement without paying any additional taxes. Both options have their merits. An IRA simply stands for individual retirement account and as the name suggests it is simply an account that doesn't have to be under the umbrella of an employer. What's interesting to note about all these accounts is that there are minimal regulations set by the IRS regarding what you can invest in. In fact, the only major rule is that the investment must be passive which would prevent you from say house flipping and then participating in the side benefits that come from that investment outside of your retirement account. The restrictions that most of us are familiar with which limit you to a small set of stock market investments are simply placed by the custodian and have nothing to do with the actual law from the IRS. This means, if you could find a custodian who does not have these restrictions then you could open your investment opportunities to things outside of the stock market such as real estate. The good news is that there are many custodians that offer these types of accounts which are commonly known as solo 401ks or self-directed IRAs.
What can you do with a solo 401k/self-directed IRA(SDIRA)?
The solo 401k/SDIRA give you the investor more control over the types of investments you can make with your account. Certainly, you can continue to place money into the stock market, but you can also invest in just about anything else you can imagine. The secret is the custodians for these types of accounts have minimal or no restrictions on what you can invest in and since the government also has very loose restrictions having a solo 401k/SDIRA allows you to make your own investment choices. While we here at Apogee favor multifamily apartment investing, you could also potentially invest in things such as other real estate assets, gold, oil or even cryptocurrency. If you would like to learn more about investing with one of these accounts and how you can get started, please reach out to us at the calendly link below and we would be more than happy to discuss it with you.
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