Today’s post is another guest post from Andrew over at SlickBucks. Pay attention as he explains how to maximize your IRA so you can be the best “future self” possible.
Tax benefits make Roth IRA’s a crucial component of a well-rounded investment portfolio. Your potential earnings can be maximized by utilizing two key methods: self-managing your accounts and decreasing costs when dealing with your assets.
The Importance of Self-Managing Your Account
Investors have almost zero control when it comes to mutual funds and pensions. Having other people in control of your account puts your investments at risk and can lead to losses in capital and a reduction in returns.
By self-managing your Roth IRA, you can diversify your portfolio and have the option to take more risks. Instead of relying on money managers or brokerage firms to handle your decisions, you are in control of using your funds to invest in the assets your desire such as companies, precious metals, or real estate. Although rules are still in place regarding what you can invest in, diversifying your portfolio can result in significant long-term payoffs.
As opposed to the conservative management of your accounts, investing in a start-up business with your Roth IRA funds may provide greater returns. Since this would be considered a riskier investment, this would rarely occur if your funds were handled by an outside party.
Is the Extra Work Worth the Effort?
You may wonder if this extra work is justified. It is important to understand that even a 1 percent difference can result in a huge return difference in the long run.
It is crucial to remember that the IRS will closely monitor your Roth IRA if you choose to manage it yourself. Creative investments such as franchises will likely require approval as the IRS will want to receive reports of any transactions as well as information on your profits and losses.
For example, if you invest in real estate through your self-controlled IRA, you are not allowed to manage the property, collect rent, or maintain the residence. A designated custodian or trustee is required to handle these duties.
If a custodian is required to become involved in the management of your assets, this will increase your costs. Read on to learn how to keep these costs under control.
How to Reduce Your Investment Spendings
Upon deciding that you want to control your own Roth IRA, you will need to determine how to limit costs and fees. Since you no longer have to spend money to cover a fund manager, you have already cut your long-term costs but it is still essential to find ways to further limit spending.
You will need to come up with ways to reduce the transaction costs associated with your purchases of bonds or ETFs. If you choose to put your funds into stocks or bonds, try finding a low-cost trading firm (E-Trade offers low-cost trading as well as expert advice).
Low-cost companies can help guide you on opening and managing accounts at a cheaper rate than banks or private brokerages.
Be sure to watch for any hidden fees or brokerage costs that can add up over time and reduce your long-term returns. As mentioned above, assets involving real estate can require the involvement of a custodian and lead to an increase in costs.
All About Custodians
It is important to fully understand the contract with your custodian and negotiate when possible. Your custodian will either charge a commission or take a percentage of your entire investment.
To reduce custodial fees, follow the three tips below.
1. Do research to find a custodian who handles your specific type of investment.
2. Prior to signing a contract, be sure you understand all of the associated fees. If you are interested in pursuing real estate, ask your custodian how he or she plans to handle rent collection, property maintenance, and other essential duties.
3. Remember that the more you know, the better off you will be. Do as much research as possible.
Although they involve extra work, managing your own account and cutting costs are essential for successfully building your long-term assets.
By controlling your Roth IRA on your own and limiting transaction costs and custodial fees, you can reach the maximum level of earnings on your account.