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2 min read

The Benefits of Using a Tax-Advantaged Account

The Benefits of Using a Tax-Advantaged Account

When considering any eligible investment, investing through an IRA provides several advantages over making the same investment with cash, such as tax-advantages, protection from creditors and bankruptcy, and flexibility in terms of investment options. This article will discuss the benefits of investing in an IRA over cash and why it should be considered when making any eligible investment.

IRA investments provide tax-advantaged growth and potential deductions for contributions

IRA investments provide tax-advantaged growth and potential deductions for contributions, making them an attractive option for anyone looking to save for retirement. With an IRA, any money earned is not subject to taxes until it is withdrawn or taxed at all in the case of a Roth IRA. This allows the money earned to be reinvested, meaning investors can make more money in a shorter period of time than if they had held the same investments in a taxable account. Additionally, contributions to some IRA accounts may be tax deductible, further increasing the potential rate of return on an investment.

Protection from Creditors & Bankruptcy - IRAs are protected from creditors and bankruptcy proceedings

IRAs are protected from creditors and bankruptcy proceedings as they fall under retirement account protections. This means that any money placed in an IRA is exempt from creditors seeking payment for debt, as well as any bankruptcy proceedings. The funds held in the account, including earnings and contributions, cannot be touched by creditors unless the IRA owner makes a voluntary distribution of the funds.

It is important to note that there is a limit in how much of your IRA funds are protected during bankruptcy proceedings, with the amount being adjusted periodically to account for inflation. The protected amount currently stands at $1,512,350.

Flexibility in Investment Options

Investing through a Rocket Dollar IRA opens a world of investment opportunities. No longer limited to stocks and bonds, you are able to easily and efficiently invest in real estate, startups, crypto, and anything else allowed by the IRS.

Investing in assets outside of stocks and bonds allows you to diversify your portfolio across various asset classes. Doing so can protect your portfolio in case of a market downturn, or a pullback in a specific asset class, as we've seen in 2022 with the pullback of the tech sector. By investing in a broader pool of investments,  investors are able to spread out their risk and potentially increase returns by investing in a diversified portfolio.

Making Investments with Cash

When investing with cash, investors may be subject to taxes based on the income they earn as well as any capital gains or losses that occur during the investment. The amount of taxes owed depends on a variety of factors, including the type of investment being made and the investor's taxable income bracket.

Income earned from investments such as stocks, bonds, and real estate are often subject to either short- or long-term capital gains taxes. Long-term capital gains taxes may be further reduced depending on the investor's taxable income bracket. These taxes can add up quickly, so investing with an IRA can help reduce the tax burden associated with cash investments.

However, cash investments do have several notable advantages of IRAs. The first is of course that growth in a cash account allows the investor to use the money for purchases before retirement age. It would, of course, be inappropriate to save and invest for a down payment on a house for example, or to fund other lifestyle purchases.

The advantages of investing in an IRA over cash are quite compelling. Investing through an IRA gives you access to tax-advantaged growth and potential deductions for contributions, which can help maximize your retirement savings. Additionally, your investments are protected from creditors and bankruptcy proceedings, giving you peace of mind that your retirement savings will not be affected by any unforeseen financial difficulty. Finally, the flexibility of an IRA allows you to invest in a variety of assets and diversify your portfolio, making it easier to manage risk and maximize returns. All of these features make investing in an IRA an attractive option for those looking to save for retirement.

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