Sarah Martinez was 28 years old when she received the most valuable financial advice she would ever get from her dad. She had just received a small enough raise for her to not lose sleep over it and, like everyone her age, she was thinking of how to use her money either to upgrade her crappy apartment or go on the dream trip to Europe. Instead, over coffee, her dad said the thing that sounded boring, "You should put that surplus money in an IRA. Just trust me."

Now, 30 years later, Sarah had over a million dollars (a million!) in retirement savings. Not because she was brilliant or bought the next Amazon—only because she listened to her dad and had the foresight to start young. Her story is important, only because it isn't special. Thousands and thousands of Americans have made serious wealth the same way, and yet IRAs still remain this confusing thing that most people completely ignore or screw up.

Here's the craziness: Individual Retirement Accounts may have been the best wealth-making opportunity that the government ever gave average Americans, yet the majority of Americans still think of it like it is a complex financial instrument only rich people and investment professionals understand. That's completely ludicrous. If you make any money at all via a paycheck, chances are that an IRA is probably right for you. Period.

What the heck is an IRA anyway?

Back in 1974, Congress decided Americans needed better ways to save for retirement. Social Security wasn't going to cut it, and not everyone had access to fancy corporate pension plans. So they created IRAs—basically special investment accounts where the government gives you serious tax breaks in exchange for promising not to touch the money until retirement.

Think of an IRA as a wrapper around your investments. This wrapper provides tax advantages, but the investments inside, stock, bonds, mutual funds, or other options are what actually provide you with money. This is like getting a discount on building savings from Uncle Sam's money.

The best part about IRAs? The flexibility. Your employer's 401(k) plan, on the other hand, probably limited you to just 20 mutual funds that were selected by some committee. With an IRA you can buy just about anything, individual stocks, thousands of mutual funds, bonds, real estate investment trusts, even gold if you want. You're in control.

Traditional IRAs: The "Pay Later" Strategy

Traditional IRAs work on a simple deal: you get a tax break now, pay taxes later. Contribute $6,000 this year, and you can deduct $6,000 from your taxable income. If you're in the 22% tax bracket, that's an immediate $1,320 back in your pocket. Not bad for doing something you should be doing anyway.

Here's where it gets interesting. Let's say Michael makes $120000 a year as a software developer. He also puts in the max for his traditional IRA account at $7000 ($8000 if he is over 50 since the government gives these older "catch-up" folks a bonus). His total income is now $113000 which is now the taxable income. Because of his contribution, he saved about $1680 in tax dollars. In essence, the government helped him subsidize his retirement savings.

Where it really gets interesting is the magic of time. Every dollar of growth, every dividend, every capital gain—none of it gets taxed while it grows. This is huge. In a regular investment account, you'd pay taxes on dividends and gains along the way, which eats into your compound growth. In a traditional IRA, everything compounds tax-free until you retire.

There's a catch, obviously. Starting at age 73, the government forces you to start taking money out through Required Minimum Distributions. These withdrawals get taxed as regular income, which can be painful if you've built up a substantial balance. Also, if you earn too much and have a workplace retirement plan, you might not be able to deduct your contributions.

Roth IRAs: The "Pay Now, Never Again" Strategy

If traditional IRAs are about deferring taxes, Roth IRAs are about eliminating them completely. You put in after-tax money – there is no deduction initially – but beyond that, everything is tax-free. Grow tax-free. Withdraw tax-free in retirement. The government is basically saying, "Pay your taxes now, and we will never bother you again."

This creates some amazing possibilities. Unlike traditional IRAs, Roth accounts do not have required minimum distributions while the account owner is living. You can allow that money to grow for decades before passing it on to your children completely tax-free. What an incredible tool for building wealth and planning legacies.

The math is often in favor of younger people. Take Jennifer, a 25-year-old teacher making $45,000. She is in the 12% bracket. So to contribute $7,000 to a Roth IRA, she is only going to have to pay about $840 in additional taxes. If that money grows at a modest 7% annually until she is 65, she will have just about $1.3 million, and it is all tax-free. The $840 she paid as a 25-year-old contributor could save her hundreds of thousands in taxes in retirement.

The trade-off? High earners get phased out of Roth eligibility. Single people making over $138,000 and married couples making over $218,000 start losing the ability to contribute directly to Roth IRAs. Everyday life is full of bumps and opportunities for navigational challenges - and the financial planning world has established work-arounds - more on those later.

Contribution Rules: The Rules in the Clouds

But the IRS caps how much you can contribute to IRAs on an annual basis. In 2024, the contribution amount is $7,000 a year, if you are younger than 50, $8,000 if you are older at each annual contribution period. This applies to your total IRA contributions, so, you could put $3,000 in your traditional IRA and $4,000 in your Roth IRA. You could not put $7,000 in each IRA, as it is the total contributions that count.

High earners have additional restrictions to consider, especially with Roth IRAs. Make too much money, and your Roth contribution ability gradually disappears. But smart financial planners figured out the "backdoor Roth IRA"—you contribute to a non-deductible traditional IRA, then immediately convert it to a Roth. There is nothing illegal about it and it allows someone with a sizable income to still realize tax-free growth.

Certain individuals may have an opportunity to do "mega backdoor Roth" conversions depending on their employer plan and could contribute $40,000 or more to Roth accounts on an annual basis. The execution of these strategies must be planned properly however they are truly game changers for building wealth.

Your Investment Options: What Will Be In Your IRA

Once you have your IRA open you are now ready to invest. This is where many people freeze up, but it doesn't have to be complicated.

Mutual funds

Mutual funds remain the most popular choice, and for good reason. You get professional management and instant diversification. Target-date funds automatically rebalance your investment mix as you get closer to retirement, which is great for people who want to set it and forget it.

Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) provide similar value but with lower fees and more flexibility. You can trade them at any time the market is open, and they're usually more tax efficient than mutual funds. A simple portfolio of broad market ETFs can be tremendously effective.

Individual stocks

Individual stocks let you bet on specific companies you believe in. The tax shelter of an IRA makes it a great place for growth stocks that might create big tax bills in regular accounts. Just remember—picking individual stocks requires more time and knowledge than most people realize.

Bonds

Bonds give you stability and income, which is an especially high priority as you approach retirement. With a tax-sheltered account, you don't have to worry about the taxable interest payments, making IRAs terrific for income-generating strategies.

Real estate investment trusts (REITs)

Real estate investment trusts (REITs) can provide you with some exposure to real estate while eliminating the need to become a landlord. They also pay some pretty fat dividends that would be taxed heavily in nonregistered accounts but grow in a tax-advantaged way in an IRAs.

Self-Directed IRAs: Beyond Traditional Investments

Most IRA providers limit you to stocks, bonds, and mutual funds. But self-directed IRAs open up a world of alternative investments: rental real estate, private businesses, precious metals, even cryptocurrency.

Real estate

Real estate is the most common alternative. You can buy rental properties, commercial buildings, or raw land within your IRA. All the rental income and appreciation happens tax-advantaged. But it is complicated—you're going to need a lot of capital, real estate experience and you have pay attention to IRS regulations on prohibited transactions.

Precious metals

Precious metals do let you diversify your portfolio and help defend against inflation. While the IRS allows certain types of gold, silver, platinum, and palladium to be owned under IRAs, it will require approved depository storage.

Private investments

Private investments can offer a return that does not exist in public markets, but they typically come with high minimums, long holding periods, high risk tolerance. Self-directed IRAs will have higher fees and more detail. There is a risk of making a mistake that constitutes a violation of IRS regulations that could disqualify your entire account. Most people will be better suited with the more traditional investment strategies.

Strategic Planning: Making The IRAs Work Harder

Smart IRA planning starts way before the account is opened and money is contributed to. It is about getting the most efficient picture of your finances.

Asset location strategy is putting different versions of investments into accounts that receive the best tax treatment. For example, high dividend stocks are better suited for tax deferred traditional IRAs instead of growth stocks that are more suitable for tax-free Roth accounts. By using a combination of a pass for traditional and Roth accounts, individuals can attain tax diversity which allows for flexibility in retirement. Tax brackets can also be managed in retirement as individuals will be able to dictate that accounts to withdraw from each year.

Roth conversion strategies can be powerful during low-income years or market downturns. Converting traditional IRA money to Roth accounts triggers immediate taxes but eliminates future taxation on growth.

Mistakes That Cost People Fortunes

IRAs seem simple, but there are plenty of ways to mess them up badly.

Timing mistakes

Timing mistakes are incredibly common. Many people wait until the last minute to make contributions, missing months or years of compound growth. If your goal is to improve growth potential on your contributions, you should set up automatic contributions early in the tax year. Both IRS and states enforce respective 6% annual penalties for over-contributing, until it, if the excess is eliminated. This is also an issue for high income earners who unexpectantly earn bonuses and raises and may unintendedly over-contribute to Roth, which can result in an expensive excess contribution problem.

Early withdrawals

Additionally, younger investors, that are have their first experience of money, may encounter challenges regarding early withdrawals, in regards of pulling from their retirement accounts for current cash flow needs. For example, you can remove your Roth contributions anytime without penalty, but if you remove your investment gains, or contributions, before 59½ (years of age), you would generally have to pay taxes on the gains and possibly a penalty.

Required minimum distributions

If you did not take a required minimum distribution (RMD) every year on your traditional IRA, you would be subject to a 50% penalty and it is one of the bigger penalties in the code. Therefore, knowing the rules and planning ahead to identify consequences can avoid some fairly large mistakes.

Moving Money Around: Rollovers and Transfers

Most people will need to move IRAs as a result of job changes, and know the rules to avoid errors and maybe optimize strategies.

Direct transfer

The safest option is to move money is to use a direct transfer. There are no tax implications nor reporting requirements for a direct transfer, due since it is being transferred directly between custodians and you never touch the money.

60-day rollover

A 60-day rollover allows you to move funds but you do get to have access to the funds while you switch over the accounts. Rolling over funds is a little more risky. If you do not rollover the funds in 60 days, the distribution is fully taxable. The IRS also limits rollovers, by defining that an individual can have a maximum of one rollover, from the total of your IRAs, a year.

401(k) funds

401(k) funds that are rolled over to IRAs typically allow more investment opportunities and more options for withdrawing funds. However, sometimes even employer 401(k) can have special features that can be even more valuable in relation to your retirement.

Roth conversions

Roth conversions will incur taxes immediately, but the funds will grow tax-free after that date of Roth conversion. When you are in a downturn in the market and your values go down significantly, these can be a very sizable advantages.

Estate Planning: Leaving a Legacy

IRAs can be significant assets, and how they are treated in estate planning can be important for both owners and heirs. New legislation has changed inherited IRAs significantly. The SECURE Act of 2019 almost completely eliminated the "stretch IRA" for any beneficiaries that are not a spouse. Most inherited IRAs must now be fully distributed within 10 years of the death of the original account owner which accelerates taxation and diminishes the value of your legacy.

Surviving spouses

Surviving spouses still get the best treatment; they can either treat any inherited IRA as their own or simply roll that asset into their existing accounts and press the reset button on required minimum distributions (RMDs) based on their own life expectancy.

Non-spouse beneficiaries

Non-spouse beneficiaries have to deal with the 10-year requirement, although there are exceptions for minor children, disabled persons, and beneficiaries that are near the age of the deceased. This makes developing a thoughtful withdrawal plan extremely valuable in order to mitigate tax implications, and trust beneficiaries are more complicated yet again.

Trusts

Trusts must meet specific requirements in order to have favorable treatment, many do not. So, you could be forced into immediate distributions and lose any associated tax remedies.

Economic Factors and Your IRA Strategy

The wider economic environment plays a role in the optimal IRA strategy. Recognizing the connections between the two can inform better decision making.

Interest rate environments

Interest rate environments influence whether investments are attractive. In a time of low interest rates, stocks previously held for growth became the default choice. However, with rising interest rates, we may need to revert back to bonds or cash income investments.

Inflation

Inflation is a key consideration for retirement planning because it destroys purchasing power over a long period of time. IrAs that own inflation resistant assets such as stocks, real estate, or Treasury Inflation Protected Securities, remain a good way to protect the buying power of retirement funds.

Tax policy

Tax policy changes all the time and can affect IRA strategies. Changes to existing backdoor Roth conversions, caps on contributions, or adjustments to rules around distributions can all change best practices. As long as you are aware of changes, you will be able to react positively.

Volatility

Volatility creates challenges, but also opportunities. Lower markets might be the best time to consider taking advantage of each available Roth conversion depending on how long it is until you take a distribution, while extreme volatility may force some to rebalance and stay focused on the long term.

Developing Your Personal IRA Strategy

Developing a reasonable IRA strategy encompasses an accurate depiction of your current situation, a clear understanding of retirement goals, and a clear vision of how the IRA fits into your overall financial plan.

Your time horizon

Your time horizon is a powerful influencer, often determining which strategies are appropriate. Generally, younger investors can have an approach that has more possibility for growth, while an investor that is getting closer to retirement may want to protect capital while generating income.

Tax position

Tax position dictates traditional vs. Roth. This should not be just based on current IRS tax brackets, but could also include possibilities that could develop from career advancements potentially pushing into higher tax brackets, going into business in some capacity, planning for possible inheritance, or the potential of legislative change.

Risk tolerance

Risk tolerance is also vital. The more you can stay focused on the long term through market fluctuations, the simpler IRAs become. Your knowledge of your own emotional reaction to volatility will help you establish an appropriate asset allocation to start with.

Your overall financial picture

Your overall financial picture incorporates items such as employer benefits, future Social Security income estimates, investments, insurance needs, estate planning, and IRAs are just one piece of that picture.

Flexibility

Flexibility is vital for IRAs because the world is fairly unpredictable, and everything that you planned doesn't always go according to plan, even if you do a good job planning. This might mean that you have to keep both traditional and Roth accounts, keep accessible investment accounts to draw cash, keep assets with custodial services, investment option flexibility, and/or keep assets in IRAs and let it grow.

The Role of Technology in IRA Management

Digital transformation has certainly changed the face of IRA management. It has brought sophisticated retirement planning capability within reach for the individual investor. Existing platforms can provide anything you could want, from automated portfolio management to full-blown planning calculators.

Robo advisors

Robo advisors introduce professional management to the masses now powered with dynamic strategies provided in the form of algorithms and at tinted percentages of traditional management fees. Many of these platforms utilize modern portfolio theory to construct a diversified portfolio with a rebalancing built-in.

Mobile apps

The power of mobile apps for overseeing and monitoring what is going on with your money at all times, is enormous. You are becoming empowered to measure performance, track contributions, and adjust allocations anywhere at any given time. Mobile tinted ease of use and convenience seem to be effective in enhancing consumer-ready contributions and engagement.

Retirement calculations

Whereas retirement calculations do enhance thinking reflecting on future, they are also fun to see what might happen through various ranges of projected contributions, returns expectations, spending strategies and planned withdrawals.

The Human Psychology of IRA Investing

The behavioral side of IRA investing is where most people stumble. You can know every rule, every strategy, every loophole, but if you can't manage your emotions and biases, you'll sabotage your success.

Take Mark, a 42-year-old engineer who opened his first IRA in 2008—right before the financial crisis. He watched his $7,000 contribution shrink to about $3,500 in six months. Like many people, Mark panicked and moved everything to a money market fund, essentially locking in his losses. He didn't get back into stocks until 2012, missing the entire recovery. That timing mistake cost him hundreds of thousands of dollars in compound growth.

The problem wasn't Mark's intelligence—it was his emotions. Loss aversion is powerful. Studies show people feel the pain of losing money twice as intensely as the pleasure of gaining the same amount. When your IRA balance drops 30%, it doesn't feel like a temporary setback. It feels like your future slipping away.

Recency bias

Recency bias tricks us into believing recent trends will continue forever. During the dot-com boom, people loaded up on tech stocks in their IRAs because "the internet changes everything." During the 2008 crisis, many shifted to bonds and cash because "stocks are too dangerous." Both groups bought high and sold low, destroying wealth.

Confirmation bias

Confirmation bias makes us seek information that supports our existing beliefs while ignoring contrary evidence. If you believe gold is the ultimate inflation hedge, you'll find plenty of websites and newsletters confirming this view. But you might miss the fact that gold has underperformed stocks over most long-term periods.

The solution isn't to eliminate emotions—that's impossible. Instead, build systems that make good decisions automatic. Set up automatic monthly contributions so you're not tempted to time the market. Use target-date funds if you can't resist tinkering with your allocation. Most importantly, write down your IRA strategy when markets are calm, then stick to it when things get crazy.

Advanced Roth Conversion Strategies

The basic Roth conversion is straightforward: move money from a traditional IRA to a Roth, pay taxes now, enjoy tax-free growth forever. However, savvy investors leverage timing and strategy to lessen the sting of taxes.

Tax bracket arbitrage

The most impactful strategy is tax bracket arbitrage. For example, you normally are in the 24% bracket, but in 2024 for whatever reason it is a lighter income year (i.e. unpaid time off, new business, spouse employment loss, etc.). Now you find yourself in the 12% bracket. Converting $50,000 from a traditional account to a Roth for $6,000 instead of your normally $12,000 tax cost.

Market timing conversions

Market timing conversions work when asset values crash. During March 2020, the S&P 500 fell 34% in five weeks. Smart investors converted traditional IRA shares when they were depressed, paying taxes on the temporarily low values. When markets recovered, all that growth happened in tax-free Roth accounts.

Here's how the math worked: Say you had $100,000 in traditional IRA stocks before the crash. The value dropped to $66,000. Convert at that point, and you pay taxes on $66,000 instead of $100,000—saving potentially $8,000+ in taxes if you're in the 24% bracket. When the stocks recovered to $100,000 and beyond, that $34,000 recovery happened tax-free.

Multi-year conversion ladders

Multi-year conversion ladders spread the tax impact over time while staying within target brackets. Instead of converting $200,000 in one year and jumping to the 32% bracket, convert $40,000 annually for five years and stay in the 22% bracket. You pay $8,800 per year instead of $50,000+ in one massive tax hit.

Asset location optimization

Asset location optimization within conversions adds another layer of sophistication. If you hold both growth stocks and dividend-paying stocks in traditional IRAs, convert the growth stocks first. Their future appreciation will be entirely tax-free in the Roth, while dividend stocks generate taxable income anyway.

Charitable remainder trust conversions

Charitable remainder trust conversions work for wealthy individuals who want to make large charitable donations. You transfer highly appreciated traditional IRA assets to a charitable remainder trust, take an immediate tax deduction, then the trust converts to Roth over time. It's complex but can save massive amounts in taxes while benefiting charity.

The key with any conversion strategy is running the numbers. Online calculators help, but consider working with a tax professional for large conversions. The wrong strategy can trigger unintended consequences like higher Medicare premiums or loss of tax credits.

International Investing in Your IRA

Most Americans keep their IRA investments in U.S. companies, but international diversification can reduce risk and increase returns over long periods. However, foreign investing in retirement accounts has unique considerations.

Currency risk

Currency risk is the obvious concern. When you buy international stocks, you're betting on both company performance and currency movements. If European stocks rise 10% but the euro falls 8% against the dollar, your return shrinks to about 2%. Over short periods, currency swings can overwhelm stock performance. But over decades, currency effects tend to average out while the diversification benefits compound. International stocks often zig when U.S. stocks zag, smoothing your overall returns. During the 2000s decade, U.S. stocks had negative returns while international stocks gained substantially.

Developed market funds

Developed market funds are the easiest entry point. Total International Stock Index funds hold companies from Europe, Japan, Australia, and other developed economies. These markets have developed regulatory systems and accounting standards that helped to reduce some risks present in emerging markets.

Emerging market exposure

Emerging market exposure will add growth from developing countries such as China, India, and Brazil. These economies often grow faster than developed nations, but with higher volatility. The key is keeping emerging markets to maybe 5-10% of your international allocation, not 50%.

Regional specialization

Regional specialization can make sense if you have strong convictions about specific areas. European stock funds benefit from the large single market and established companies. Pacific Rim funds capture Asian growth stories. But avoid putting too much in any single region—diversification is the whole point.

Tax considerations

Tax considerations for international investing in IRAs are generally favorable. You don't pay foreign tax credits directly (since IRAs are tax-sheltered), but fund companies often pass through some benefits. More importantly, you avoid the complexity of foreign tax reporting that comes with international investing in taxable accounts.

International REITs

Real Estate Investment Trusts (REITs) from other countries offer property exposure without direct ownership headaches. International REIT funds hold shopping centers in Australia, office buildings in Germany, apartments in Japan. Real estate markets don't always move together globally, providing another diversification layer.

The simple approach is holding one international stock fund as 20-30% of your equity allocation. Vanguard's Total International Stock Index Fund, for example, holds thousands of companies across dozens of countries, providing instant global diversification for a tiny fee.

Sector Rotation and IRA Timing Strategies

While market timing is generally a losing game, sector rotation—moving between different industry groups based on economic cycles—can work for disciplined investors willing to do the research.

Awareness of the economic cycle

Awareness of the economic cycle is crucial. Investors may see financial stocks outperform during the early part of the economic recovery stage as interest rates start to rise and loan growth begins. In the next part of the cycle, spending grows and consumer discretionary stocks benefit. Toward the end of the cycle, defensive stocks like utilities utilities and consumer staples typically outperform.

Interest rate sensitivity

Interest rate sensitivity impacts sector performance. When rates are rising, utilities and REITs tend to struggle because their dividend yield is losing relative value to bonds. Additionally, high value technology may also feel pressure due to investor resistance to pay premium prices for growth. By contrast, banks tend to see an improvement to their margin from rising rates.

Commodity cycles

Commodity cycles open the door to opportunities in energy and materials. Oil related stocks tend to move with crude prices as do precious and base metals mining companies. These markets can be extremely volatile but provide diversification sources away from mainstream growth stocks.

Technology sector

Technology sector involves evolution, and for a full understanding, consider the differences in industry types. Cloud computing stocks will move similarly, but may not have any correlation with semiconductor company prices, or social media publicly traded platforms. The broad label of "technology" in fact misses a number of significant distinctions that I think are important, however a practical approach to the investment purpose is to hold core positions with broad funds, and use 10-20% of the IRA type account for sector bets. It provides partial down side risk diversification of other assets while permitting those tactical changes.

Rebalancing rules

Rebalancing rules keeps sector timing from being speculative gambling. You can set limits like " If energy exceeds 15% of my total portfolio balance, I'll trim it back to 10%". In this way you are forced to do what you don't want to do: "sell high" "buy low". It also builds wealth over the long run.

Sector ETFs

Sector ETFs make sure the implementation doesn't require too much effort. Buying financials could be as simple as buying one fund vs. a handful of individual bank stocks. You take away a significant amount of company-specific risk, whilst maintaining a sector bias.

All along keep in mind rotating sectors requires more active oversight and management, than just diversifying broadly. You need to have an understanding of broader economic trends, earnings cycles, regulation of both public and private company news. For most people, this engagement is not worth the potential outcomes when compared to basic diversified, index tracking portfolio models.

Advanced Estate Planning w/IRAs

Most think IRAs are just retirement accounts. In fact they're wealth transfer vehicles that can benefit multiple generations with the right planning. The SECURE Act of 2019 altered most rules, but provide plenty of opportunities leaving a great legacy for your family and more.

Stretch IRA removal

Stretch IRA removal may have been the biggest changes to financial and estate plans. Previously, stretching the internal tax-deferred growth on IRAs, provided a tax advantage for younger beneficiaries and could be stretched out over their respective life spans for some decades. Now most beneficiaries, who are non-spouses must have withdrawn 100% of the IRA assets within 10 years.

However, the 10 years rule does have hidden caveats. You do not have to take a distribution each year; you could wait till year 10 and distributed all at once. This may make sense in your tax planning if you expect to be at lower tax brackets later in your timing, however you would concentrate all that tax obligation in one tax year.

Planning during the 10 years

Planning during the 10 years may come easier once the time and tax conversation ending before the tax minimization of distributions is decided. For example if you inherited a $500,00 traditional IRA and took $50,000 each year over time before hourly income raised your tax burden, would likely benefit by keeping total income under 22% bracket. However, if you waited and took $200,000 yearly for 3 years would leave you with a hefty tax burden which would nearly offset your tax-free authority. You would owe an extra $50,000 dollars in taxes on income extracted from the same investment!

Roth IRA advantages for estate planning

Roth IRA advantages for estate planning are substantial. Inherited Roth accounts still have the 10-year requirement, but withdrawals are tax-free. This means beneficiaries get maximum wealth transfer without the tax burden.

Charitable beneficiaries

Charitable beneficiaries avoid the 10-year rule entirely. Naming a charity as IRA beneficiary means they can take the money immediately without taxes (since they're tax-exempt). If you want to leave money to charity anyway, this works quite nicely; it may even work out better than leaving taxable assets and counting on heirs to make charitable gifts.

Trust beneficiaries

Trust beneficiaries face added complexity; the trust must meet certain IRS requirements to comply with the 10-year rule, and many trusts don't meet the requirements, forcing distributions that annihilate the tax-deferred growth. Engage estate attorneys who know about retirement account rules -- not just trust law, in general.

Multiple beneficiary strategies

Multiple beneficiary strategies can optimize outcomes for different heirs. You might leave the Roth IRA to your youngest child (who has the longest time horizon for tax-free growth) while leaving traditional IRAs to older children or charities.

Life insurance coordination

Life insurance coordination can replace IRA wealth that gets consumed by taxes. Instead of leaving a $1 million traditional IRA that might net $600,000 after taxes, use some current IRA distributions to buy life insurance that pays $1 million tax-free to beneficiaries.

State tax considerations

State tax considerations are important when we're talking about IRAs you inherit. Some states don't tax retirement account distributions at all; others have high taxes on the distributions. In fact, there may be an opportunity for people to relocate to states that do not levy taxes on these distributions before they take a large amount.

The takeaway is that IRA estate planning involves the coordination of retirement planning, tax planning, and estate planning. The decisions you are making regarding Roth conversions today will have a massive impact on your children's tax bills in the future, decades from now. Given the complexity, consider working with advisors who specialize in multigenerational wealth planning, not just investment management.

Building Wealth Through IRA Real Estate

Self-directed IRAs that invest in real estate represent one of the most powerful but complex wealth-building strategies available. The tax shelter of an IRA combined with real estate's income and appreciation potential can create substantial wealth, but the rules are unforgiving.

Choosing an income-producing property in an IRA

The process of choosing an income-producing property in an IRA differs from the process of investing personally in property. You wouldn't take possession for yourself; in other words, you wouldn't have vacation property, or rental property your kids lived in. All transactions must be at arm's length, and all income and expenses must flow through the IRA. In other words, you couldn't claim mortgage interest or depreciation on your personal tax return for an IRA property, because the property is owned by the IRA.

Financing

Therefore, also consider the financing issues. IRAs can borrow money to buy real estate, but it triggers "Unrelated Business Income Tax" (UBIT) on the financed portion of income. If your IRA owns a $200,000 property with a $100,000 mortgage, roughly half the rental income gets taxed at trust tax rates (which are high). Despite UBIT, leveraged real estate in IRAs can still make sense. You might net 6-8% returns after taxes, which beats many bond returns. Plus, the more you pay down the mortgage, the more income you can enjoy tax-free.

Property management

Property management becomes crucial, yet tricky. You can't personally manage IRA real estate and you can't hire your friends to manage IRA real estate which constitutes a prohibited transaction. Whether you hire a management company or choose a passive investment like a real estate syndication, due diligence is an important factor when you are choosing a property that you cannot personally inspect, manage or maintain. Many IRA real estate investments go wrong because people buy sight-unseen or trust promoters without proper verification. The IRA rules don't protect you from bad investments, just from personal use.

Exit strategies

Exit strategies need planning since IRAs have required distribution rules. Traditional IRAs force distributions starting at age 73, which might require selling properties. Roth IRAs don't have lifetime distribution requirements, making them better for long-term real estate holdings.

Alternative real estate approaches

Alternative real estate approaches may offer some exposure because you don't have ownership issues to navigate. Real estate investment trusts (REITs) are listed on stock exchange and have an underlying portfolio of properties. Real estate crowdfunding platforms may get you involved at a more reasonable price point in, a commercial or other real estate investment. Although alternative real estate investments may be liquid little and have professional management, in the end they may also offer returns that are tax free using your IRA.

Due diligence on crowdfunding platforms

Due Diligence on the crowdfunding platforms is especially important, as it is a new evolution in the investment space. Always look for established performance history for the crowdfunding platform, management experience at the sponsor, and a transparent fee structure. Most real estate crowdfunding platforms have an annual management fee of 1-2%, plus a performance-based fee based on returns. Keep in mind that these fees diminish returns.

Real estate investment trusts, REITs, may be sufficient for most people as far as real estate exposure in their IRA and would have exposure limited to the intricacies of ownership. However, for the sophisticated real estate investor with substantial cash balances in their IRA, owning real estate creates wealth that can compound tax-free for a long time.

Looking into the Future of IRAs

The IRA space continues to change driven by demographic changes, economic conditions, and policy developments. It is important to understand what is in the market relative, to positioning yourself for ideas moving forward and avoiding any trouble.

Legislative proposals

Ideas for legislative proposals change regularly and can have profoundly substantial implications for IRA rules. Ideas like eliminating backdoor Roth conversions and proposed Roth RMDs have also been mentioned around limiting contributions based upon account balances.

Demographic shifts

Demographic shifts will continue as boomers retire and millennials hit their peak years, continuing to influence product and investment strategies. Financial companies have spent substantial development dollars designing new tools for accommodating the various generational needs.

Investment innovation

Investment innovation continues to expand with open availability. ESG funds pop up into the market on a steady basis for retirement investing options, crypto for retirement investing is becoming the norm, fractional shares, and other new investment vehicles come about regularly.

What Should You do Next: Your Next Steps

Individual Retirement Accounts are probably one of the most powerful wealth-building opportunities we have in this country for American workers. The tax benefits, investment flexibility, and potential for compound growth can be serious contributors to the overall retirement impoverishment issue in America—but only if you choose to take advantage of them.

Getting started

Getting started is your most important step in the process. If you are starting at 22 or 52, if you can contribute the max or a mere fifty dollars a month, by beginning to use your IRA today gives you time and compound growth on your side.

Stay engaged

The second most important step is to stay engaged, regularly review your decisions, and to adjust as your situation demands. Sarah and her return at the beginning of this chapter was not attributable to proper investment selection nor proper market timing. It was attributable to getting started early, regular contributions, and long-term focus through a volatile market, and life changes. The same path is available to anyone willing to take that initial first step.

I promise you will thank your IRA-investing self now for the considerations you make today. The issue is not whether you can afford to get started; the issue is whether you can afford to not afford to use this. Every day you wait is like another missed opportunity for your investments to grow, a wasted opportunity for you to achieve financial independence from IRA accounts, and every day you step away from the financial freedom that IRAs help create.

The tools, skills, and opportunities exist right now. All that takes place is your decision to act. Your retirement is waiting for you! It has never been easier to take that first step to build your wealth.