How to use Self Directed 401k for Investing in Tax Liens?

Retirement planning is an important part of personal finance and it demands equal attention. Much like regular employees, small business owners and self employed individuals have to plan their retirement savings. In most cases, self employed individuals often limit their retirement investments because of the lack of promising investment options. That is where self directed 401k comes in. It offers versatile investment options including tax liens.

self directed 401k

Tax lien is a legal claim imposed by the government against the assets of a non-compliant taxpayer. Self directed 401k retirement plan allows investment in tax liens, which are not as explicitly used for investment purposes as other investment options. Investing in tax liens offer tax-deferred capital gains, which are redirected into the retirement account. One can purchase tax liens at public auctions conducted by the local or state government.

What are the different types of tax liens?

There are two different types of tax liens including tax lien certificate and tax lien deed. In a tax lien certificate, the homeowner promises the investor to repay the amount with interest within a specified period. In case of failure, the investor receives the deed of the property for a fraction of its overall cost.

In a tax lien deed, the investor is buying the property for a particular amount and upon agreement; the deed is transferred in the name of the investor. It is up to the sole discretion of the investor to use the property in anyways deemed useful.

What are the benefits of investing in tax liens?

Tax liens are safe yet profitable investment options and they can offer up to 16% annualized returns. As per the repayment terms of tax liens, one usually receives the complete investment with interest within a year. These capital gains are tax-deferred if investment is made through Self directed 401k. With average annual returns, the money invested through tax lien could double within 5 years, which makes it an attractive investment choice.

The important thing is to keep the money and annualized returns within the retirement plan for tax-free growth. One can withdraw these funds after the age of 59 ½ years and pay the due taxes (if any) upon withdrawal.

Self directed retirement plans offer checkbook control, which allows hassle free investments in tax liens. Unlike regular retirement plans, the plan owner doesn’t need to seek custodian’s consent for purchasing tax liens. In fact, the checkbook control facility offers the freedom to invest at a moment’s notice and it is as simple as issuing a cheque.

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