- Local Guide
(NewsUSA) - Tax season is in full swing, and many people are being reminded of the tax burden their investment returns carry.
As a result, some are adopting a smarter strategy for maximizing long-term returns by deferring taxes and allowing gains to compound over time. This route can generate considerable savings simply by enrolling in a tax-deferred retirement account and investing through it.
"Tax-deferred accounts provide an opportunity to boost overall investment returns by deferring taxes until the age at which you begin required minimum distributions," said Preston Despenas, co-founder and senior partner of Growth Equity Group. "While some of the most common choices are traditional accounts, self-directed IRAs are gaining significant momentum with investors because they allow greater investing flexibility."
There are several types of tax-deferred accounts that allow people to maximize long-term returns:
* Investing Pre-Tax vs. Post-Tax Income. With traditional Individual Retirement Accounts (IRAs) or 401(k) plans, contributions are made to the account with pre-tax income. Later, when the funds are withdrawn, they're taxed just like ordinary income.
* Tax Incentives With Self-Directed IRAs. For investors seeking to invest in alternative assets to safely diversify their portfolios and generate income, the lesser-known self-directed IRA is also tax-deferred, but provides additional flexibility. This account enables the holder to invest in assets such as residential property, commercial real estate, precious metals and oil.
* Using Real Estate to Diversify. Self-directed IRAs can help protect from risk through diversification and, for that same reason, can provide extra earning power. Real estate tends to be less correlated with the stock markets and thus is less volatile when the markets experience wide swings.
With a rental property asset in a self-directed IRA, rent payments from tenants are directly added to retirement savings, where they compound and grow tax-deferred until the investor takes a distribution in retirement. Self-directed IRAs are managed by a qualified custodian on behalf of the investor. The trustee helps file the proper annual IRS reports to ensure compliance with the tax code.
"Real estate and rental properties are popular investments because they can generate income in addition to a long-term return on investment," said Brett Immel, co-founder and senior partner of Growth Equity Group.