SDIRA and the middle class trap

[Kyle Luman]

Toward the end of the BP money podcast recently on SDIRA, Scott Trench made a comment about how using a SDIRA to invest in real estate could help people get out of the middle class trap (all or most of one's wealth being in the primary residence and qualified retirement vehicles). I see how using a SDIRA to invest in real estate can help to diversify one's portfolio and could be advantageous overall, but I don't really see how it moves someone out of the middle class trap. The money that was in index funds in the IRA or 401(k) is still in those qualified vehicles, just invested differently. One still would have to go through hoops (set up a Roth IRA conversion ladder, access your 457 money first or rule 72t (SoSEPP)) to access those funds if one retires early. Am I missing something?

[Dmitriy Fomichenko]

I did not listen to the podcast, but here are my thoughts on investing through self-directed retirement vehicles: 

You should use it in combination with other vehicles/investment strategies. I agree with @Kyle Luman that if all of your wealth is in an IRA it would be difficult to retire early.

Having said that, it is still possible to access retirement funds early. Contributions from Roth IRAs and Roth 401ks can be pulled out at any time, tax-free. You can also employ the periodic equal distributions rule to access your retirement funds prior to retirement age without penalties (but again, there are limitations, and you must make a commitment). 

A Truly Self-Directed Solo 401k plan is a great vehicle to help escape a middle-class trap and build massive amounts of wealth tax-deferred (or possibly tax-free by utilizing Roth component of the plan). This plan allows you to contribute over $70,000 annually (possibly double that if your spouse also participates).  However, this plan is not for everyone, you must be self-employed or own a business without employees, and the contributions can only be made from business profits. There are more benefits such as a participant loan, exempt from UBIT on leveraged RE, unlimited investment options, checkbook control, and spouse participation. 

The bottom line is you should use multiple strategies that will work for you to get ahead and retire early. Good investing!