So today’s question comes in from Brock and he says, hello, Marco. I just listened to your two-part series regarding wealth growth and creation using one’s IRA and found it very interesting. And I plan on listening to it multiple times. Am I able to do something similar to this concept with my 401k, or does it have to be a self-directed IRA? Thank you very much for your time and podcast Brock.
Okay, so this is a very good question. And so just as a quick recap, these are individual retirement accounts. These are retirement accounts that you can self-direct and it gives you the investor control over the buy and sell decisions of whatever you’re doing with it. It permits the ability to invest in alternative investments. Other asset classes from precious metals to even cryptocurrency.
A lot of people use them to invest in notes, performing, and nonperforming notes. You can use it for real estate. There’s very few limitations. It’s typically art collectibles and the light. The short answer to your question is anything and everything you can do with a self-directed IRA. You can also do with a self-directed 401k, they’re slightly different vehicles, but they are essentially accomplishing the same thing, which is allowing you to defer the taxes that you would normally pay on income and gains that you make from your investments to later years. And the power of that is that you can take that tax money or what you would be paying in taxes. Now today, this year and applying that towards those investments. So you actually have more purchasing power if you will, because you have more to invest from the deferral of the taxes. And so that allows you to essentially compound and accelerate the growth in your retirement account.
But what you can do in a self-directed IRA is the same as what you can do in a self-directed 401k, as long as they’re both. Self-directed the thing with the 401k is often those are tied to employers. And so you’re going through your HR department and whoever the administrator and custodian is, that’s tied to that 401k. And so often you don’t have a lot of flexibility. In fact, most of the time they’re not self-directed. So you need to actually talk to your employer or HR department to find out if it can be self-directed and if it can, what you need to do sometimes they’ll just tell you that it can’t win an actuality. It can be some of the time. I know they don’t like to turn it into a self account cause it’s more administrative work. And sometimes it’s just outside the lane of where they want to operate that 401k.
Now, if you leave the employer, then the 401k comes with you. It goes along with you. You don’t have to cancel it. You don’t have to liquidate what’s in the 401k. It just becomes a 401k that is now attached to you and you are responsible for it. Your employer has nothing to do with it anymore. And if you were getting contributions where you would get a match, so for every dollar you put in, they would put another dollar or 50 cents just as a match in your contribution. You obviously lose that because you’re no longer with that employer. So now you have the ability to convert that 401k into a self-directed 401k of some kind, such as a solo 401k. I would just go back to the recent podcast episode about this topic. In fact, I think it turned it into a two-part episode just because it was so long with so much detail, but it’s worth going back to listening to that because we talk about wealth growth and creation strategies, using self-directed retirement accounts.
That is basically the long and the short of it. Just some last comments here, self-directed IRA is held by a custodian that you choose. So they essentially hold the IRA assets and execute the purchase and sale agreements or whatever paperwork is required for the investments that you make. So they’re essentially handling that retirement vehicle on your behalf. As far as contribution limits go, the same limits apply for a regular IRA as a 401k plan with an IRA. The maximum IRA contribution is $6,000. Plus a $1,000 catch up for those that are age 50 and above. And the maximum for a 401k plan is 19,000 in 2019. It is 19,500 in 2020. And you also have a $1,000 catch up. The withdrawal rules are also the same at age 59 and a half. You will trigger a 10% early withdrawal penalty if you withdraw from those retirement accounts before age 59 and a half.
So that’s kind of the line in the sand. So after 59 and a half, there is no early withdrawal penalty, the required minimum distributions begin at the age 70 and a half. And that was true to the end of 2019. And I do know that as of January 1st, 2020, there was a new law that was enacted, and that extends the age for taking required minimum distributions to 72. And I guess the last comment would be that if you choose a Roth option for either one of these self-directed IRA or four Oh one, [inaudible], the Roth option allows you to place funds into your retirement account with after-tax dollars. And the rules are pretty much the same, but the benefit is that when it comes time to make your distributions or your withdrawals from these accounts, they are essentially tax-free. So you’re paying the tax on the front end, but you’re now not paying taxes when you make your withdrawals later.
So to me, that’s a math question. Does it make more sense to put money into your retirement accounts after tax on the front end and make some good decisions and investments along the way, and then be able to take those out later tax-free or do you think it makes more sense to put the money’s in now before tax defer the taxes and then take advantage of that deferred tax in terms of the dollars you can invest and then later pay the taxes on the distributions you take out of your self directed IRA or 401k. All right. That was a mouthful.
Anyway. I hope that helps Brock. Thanks for the question.
If you have a question about real estate investing or finance, and you’d like to try to get me to answer on the show, cause I’m getting inundated with these questions, but I love them. So please keep them coming in. Just go to passiverealestateinvesting.com or AskMarco.com, submit your question and I will do my best to get to it. And I’m going to try and do them a little bit faster and a little more often, if you haven’t already subscribed, remember to do so. Just click the subscribe button. Thank you for listening. And I will see you on the next episode.
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