Masters Series: How to Take Control of Your IRA

Editor's note: One simple decision could add $200,000 to your retirement account...

In today's edition of our weekend Masters Series – originally published in Dr. David Eifrig's Big Book of Retirement Secrets – "Doc" explains how to take advantage of this option... and explains the best way to manage your retirement account...

How to Take Control of Your IRA
By Dr. David Eifrig, author, Big Book of Retirement Secrets

One of the joys of investing is watching your money grow...

Putting your money into investments that continuously build your nest egg means all the difference between having a comfortable retirement and just scraping by.

My sister began building her wealth early in life... adding to her savings regularly and reinvesting her dividends and cash distributions. My dad waited until he was older, but followed this strategy as well.

But the real secret is to do this strategy in a tax-sheltered investment account – also known as an individual retirement arrangement (IRA).

Getting money into an IRA allows compounding of returns without the government shaving off any of the principal. The difference between compounding without paying taxes and paying taxes along the way can be seen in the following chart...

Two people start off with $10,000 each. One put his money in a tax-deferred account. The other did not. Over 30 years, the tax-deferred account would be worth $996,964. The taxed account would be worth $791,347. That's more than $200,000 extra just by avoiding taxes.

Today, several forms and types of IRAs exist...

The two main types of IRAs are traditional IRAs and "Roth" IRAs. (The latter is named after Senator William Roth, of Delaware, who sponsored the legislation that created these savings vehicles.)

When you put money in a traditional IRA, you get a tax deduction for the initial deposit and the government defers taxes on the money until you withdraw the money. As a general rule, you may start taking money out at age 59.5... But you must start taking money out at age 70.5.

With Roth IRAs, you pay taxes on the money before you put it in. Then when you take out your money in retirement, you don't pay taxes on any of it.

Plus, Roth IRAs don't have a required minimum distribution... So you can start withdrawing money when you're 80... 90... or even leave it all for your heirs.

Many people first open their IRA account using the money from their savings account or a certificate of deposit (CD). But when savings accounts and CDs yield less than 1% (like in 2014)... you don't get much for your money by doing that.

Other people have IRAs through a brokerage account. This allows you to invest in stocks, bonds, and options... This is what I recommend.

The best way to manage your IRA is through a self-directed IRA... A typical IRA is managed by the brokerage you hire and limits you to conventional investment choices.

A self-directed IRA is exactly what it sounds like... It puts you in charge of what you invest in. In addition to the conventional investments you can make in a typical IRA – things like stocks, bonds, and options – a fully self-directed IRA allows you to invest in many other things, like real estate (as long as it's not personally used), private stocks, businesses, and even precious metals.

You can invest in just about anything, as long as it's not employed for your personal benefit. For example, you can buy the house next door within your IRA and then rent it to a neighbor. You can also invest in a local small business. Contact the companies we mention at the end of this chapter to learn more.

I use my self-directed IRA to generate income by selling stock options. When I use this account for options trading, I have no accounting or tax requirements to follow. I don't pay taxes on that money until I withdraw it.

If you do all your trading inside a retirement account, you won't have to report any trades to the IRS. The goal is just to maximize your total returns as quickly and as easily as you can.

Two investments not allowed within self-directed IRAs are collectibles – like cars, wines, and stamps – and life-insurance contracts.

To open a self-directed IRA, you need to find a custodian that allows you to make your own investments – usually a brokerage or bank. You can call your current brokerage to see if it offers self-directed IRAs. If not, several companies do.

Below are the names of two places you might consider for doing a self-directed IRA. (I get no consideration from either of them.)

PENSCO Trust Company

866-818-4472

www.pensco.com

Equity Trust Company

888-382-4727

www.trustetc.com

Always do your research before investing with any custodian. And be sure you're doing it because you have specific investments in mind.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: Earlier this year, we published Dr. David Eifrig's Big Book of Retirement Secrets. In it, Doc reveals more than 250 clever "hacks"... including how to legally hide money from the U.S. government... a little-known strategy that can generate up to $15,000 tax-free every year... how to save 30% on your health care expenses... and how to gain early access to your retirement savings. Click here to claim your copy.