There are many ways to make self directed IRA passive income. Truthfully, all of the investments you make from within your retirement account earn passive income, because of compounding interest and the tax-deferred or tax-free status of the account.
Look at this example. If at age 25, you began to put $4000 per year into a savings account earning 8% compounding interest, by age 55, you should have $449,133. But, you wouldn’t, because the interest earned in a standard savings account is taxable.
So, in actuality you would only have $286,752, assuming a 31% tax rate each year. That’s 43% less, a difference of $162,381. That amounts to over $5400 per year. In other words, just by opening an approved tax sheltered retirement account, you begin to earn more money every year, passively.
Some self directed IRA passive income is directly related to the amount of money that you make today. Depending on your income level and the type of account that you open, you could be eligible for as much as a $51,000 tax deduction, each and every year.
You have to realize that tax savings is the same thing as money earned. That’s particularly relevant when you look at some less traditional investments that you can make from within the account.
Suppose you find a two bedroom “fixer-upper” that you can purchase for $24,000. Investing an additional $7500 allows you to rent the house out for $10,000 per year. You decide to have a third bedroom added to the home, to increase the property value to $135,000 and your tenant decides to buy it. After all is said and done, your net profit is $93,500.
But, since you used personal funds, instead of using your retirement fund, to conduct the transaction, you have to pay capital gains taxes and additional taxes on the rents received. That can add up to 23% of the total profits or $21,505.
This is an actual example of how an experienced real estate investor earns self directed IRA passive income. He did none of the work, himself. All of the expenses were paid from within the account. All of the profits returned to it. A contractor was hired to do the work. The only thing that he did was take advantage of a good deal when he saw it.
On top of his profits from the deal, the interest earned, just on the amount that he would have paid in taxes, will amount to another $25,000 in ten years. The $93,500 would more than double in ten years.
If this kind of self directed IRA passive income is made within a tax-sheltered Roth account, no taxes are ever paid on any of those earning. Roth contributions are taxed as regular income, but qualified distributions are not taxed.
With just a couple of profitable real estate investments, your self directed IRA passive income will grow faster than you ever dreamed possible. You just need to learn how to spot a good deal or get some good advice from an experienced investor.