What if you could double your investment earnings by simply using a different account? It’s possible inside a self-directed retirement account.

Before we dive into a real example with numbers, let’s take a look at what these accounts are and who can open one (hint: anyone with a business – like real estate investing).

What is a self-directed retirement account? 

Retirement accounts are investment accounts that individuals use to grow their savings in a tax-sheltered environment to use in retirement. This can be an IRA (or individual retirement account), a 401k or a QRP (or qualified retirement account). We typically associate these accounts with an employer. Perhaps your employer offers a 401k with a company match contribution. Hopefully, you’re taking advantage of that free money!

As you put money into this account, you either pay the income tax on it now and it grows tax-free. Or you defer that income tax until you withdraw it (during your retirement years when theoretically your tax bracket will be lower). The key here is the tax-free growth of your money. You don’t have to pay any income tax on your earnings as you make them.

There are a few limitations and rules to what you can invest in with these accounts. Like you can’t buy a vacation rental home that you plan on using. We aren’t financial advisors, CPAs or lawyers. You’ll want to get the nitty-gritty by speaking with those experts here.

Self-Employed Real Estate Investors Have Access To Self-Directed Retirement Accounts

Now the myth here is that you have to be employed full-time to have access to one of these accounts. Not true. Self-employed real estate investors can also have a self-directed IRA, a solo401k, or an eQRP. 

Individuals and small businesses can access these tax benefits. AND you can use the funds to invest in real estate – not just the stock market. In fact, the options for investing are fairly wide open like real estate, mortgage notes, private placements, tax liens, and more.

Mortgage Note Investment Example

Let’s look at an example of how this strategy can allow you to build wealth quicker. You put $100,000 into mortgage notes and earn 10% per year – which is the LOW end of what we see in our Note Investments here at Flow State Investing – while your earnings are taxed at 33% per year. 

At the end of 20 years, you’ll grow that $100,000 into about $343,000 after paying your income tax every year.

Now, if you put that initial $100,000 in a self-directed retirement account, you wouldn’t be paying that 33% each year on your earnings. In 20 years, you would have grown that same $100,000 into about $673,000. 

That’s nearly DOUBLE the amount you’d have if you invested OUTSIDE of your retirement account.

Use retirement accounts as an investment

These accounts are powerful for growing income tax-free. Remember, you will either pay taxes on your money before putting it into the account or when you pull it out. It is always best to talk to your CPA or tax strategist to fully optimize your wealth building with something like this. Remember, you won’t have access to these accounts until you reach retirement age, or you’ll pay a penalty for taking the funds out early. But, chances are, you’re going to want some passive income then. 

These accounts are also great ways to diversify out of the stock market while also sheltering your income from taxes. Note investing is one of the best types of real estate for self-directed retirement accounts.

If you are interested in investing in real estate-backed notes, join our Flow State Investor Circle. It’s free to join and will give you access to more education and information about growing your money through mortgage Notes. We’ll also jump on a call to discuss your investment goals and whether a Note partnership or fund may be right for you.