As most successful investors will tell you, generating passive income and purchasing high-growth assets are the two quickest paths to wealth and retirement. And only one retirement account allows you to pursue both. 

Self-directed IRAs (SDIRA) combine the tax advantages of a Roth IRA or TSP with the flexibility to generate passive income via real estate, gold, private lending, Bitcoin, or whatever you desire. 

This article will discuss the benefits of a self-directed IRA over other conventional retirement accounts for veterans and provide step-by-step instructions on how to open an SDIRA. 

What Is a Self-Directed IRA?

A self-directed IRA is an individual retirement account that allows individuals to invest in a wider range of assets, such as real estate, which are unavailable to traditional IRAs or TSPs. SDIRAs can be structured as a traditional or Roth account, allowing veterans to contribute tax-deferred or after-tax dollars. 

Let’s suppose you purchase a piece of real estate and flip it with SDIRA funds. If you have a Roth account, all proceeds from the sale will be entirely tax-free. The potential to combine the tax benefits of an IRA with the growth potential of real estate can’t be pursued anywhere else. 

We should note that SDIRAs come with a whole host of rules and regulations–known as prohibited transactions–and higher fees than a TSP or traditional IRA. 

Another difference is that SDIRAs are run by custodians, not traditional depositories. Custodians help manage your account and are knowledgeable in a wide range of assets to help you conduct transactions in your retirement account according to the rules laid out by the IRS. 

Pros and Cons of a Self-Directed IRA for Veterans

Pros

• Same tax benefits as a traditional or Roth IRA.
• Flexibility to invest in a wider range of assets.
• Individually tailored investment strategies (ex., Real estate enthusiasts will benefit).
• Higher potential for returns–depending on the asset.
• Inflation hedge: Some alternative investments perform better against inflation than the stock market.
• Checkbook control: SDIRAs offer the ability to form an LLC with your retirement account (more below).

Cons

• Higher fees than TSPs–depends on the custodian.
• Several rules governing transactions (ex., you cannot perform labor on a house bought with SDIRA funds, this must be contracted).
• Riskier investment options.
• Higher chance of fraud–this can be minimized with appropriate research.

How Do Self-Directed IRAs Stack Up Against Other Retirement Accounts?

Checkbook Control: Forming an LLC with Your Retirement Account

Limited-liability companies provide legal and tax benefits beyond what the average individual enjoys. Fortunately, SDIRA accounts can form an LLC inside of their account, which provides another layer or security and control over their investments. 

One advantage of this approach is the ability to exercise checkbook control. This allows you to cut checks straight from your account using your LLC to bypass your custodian. In the fast-paced world of real estate, this can be critical to securing financing for a deal on the spot when other bidders are around. 

Opening an SDIRA LLC is easy, and custodians like Horizon Trust can help you begin the process.  

Investment Options for Passive Income Using an SDIRA

Generating passive income through retirement can give you a nice lump sum to live off of in retirement or a steady income source you can use for monthly payouts. Let’s explore some ways to start generating cash flow using an SDIRA. 

Real Estate

Real estate ownership is still the #1 path to wealth in this country and a great source of passive income. Some ideas to generate income from real estate include:

• Rental Property Investment: Generate income from tenant rents as you manage a property.
• House Flipping: Generate tax-free gains from selling a property at market value.
• Wholesaling: Buy seller’s contracts and find investors; a great strategy for property rehabs and flips. 
• Tax Liens: Purchase a tax lien on a house and collect the repayment at interest or collect the house as collateral if the holder defaults. 

One amazing advantage of using an SDIRA to finance real estate is that you can syndicate deals with other SDIRA holders without using your own cash. 

Cryptocurrency

Cryptocurrencies like Bitcoin, Ethereum, and Dogecoin offer high-growth potential and can even be staked for passive income. Whether you mine or buy/sell crypto, there are great ways to earn high returns using this volatile asset. 

Private Equity

Own and manage a piece of a company by investing in private equity using your SDIRA. While it requires some active management, you can invest with other partners to generate sizable gains once it comes time to sell your piece of the property. 

Private Lending

P2P lending is great for generating income by lending people money at interest. Like a bank, you can get a steady stream of income as long as the buyer can repay you. 

How to Open a Self-Directed IRA

Opening a self-directed IRA is straightforward and your custodian will be there to assist you along the way. 

Step 1: Research a Custodian

Be wary of scams, and don’t respond to SDIRA companies promising zero fees or to make you rich. Find a reputable company with good reviews from its customers and talk to their team to see if they are knowledge in the investment strategies you want to pursue.   

Step 2: Complete a Rollover or Transfer

Rollover your TSP, IRA, or 401(k) tax-free using a direct rollover. These exchanges are conducted by your custodian, and some–like Horizon Trust–don’t charge a fee. 

Step 3: Fund Your Account

Contribute to your account the same way you would an IRA. Contribution limits for SDIRAs are capped at $6500, but individuals 50 and older can contribute an additional $1000. 

Step 4: Research Investments

Finally, it’s time to start putting your money to work for you. Veterans can benefit by generating passive income through their SDIRA, which will allow them to retire early and earn steady income during their golden years. 

SDIRAs are not the conventional retirement account you are sold when you leave the military, but they can be a game-changer for veterans who are a little bit financially savvy. Even if you just want to pursue a joint real-estate strategy using your discretionary funds and retirement account, having the flexibility to do so with an SDIRA makes all of the difference.