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Conservative IRA Investing

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A self-directed IRA is one of the least understood retirement savings options. People simply don’t understand the significant differences between a traditional IRA and a self-directed IRA. Part of the misunderstanding comes from the fact that there are actually a lot of different IRAs available.

Although the same basic IRS rules govern all IRAs, a self-directed IRA is a distinct type of retirement account, even different in several ways from traditional IRAs. The differences don’t come so much from the Internal Revenue Code as they do from the marketing hype put out by bankers, stockbrokers, and financial planners – other people wanting access to your retirement funds.

Even a conservative self-directed IRA can be managed completely different from an aggressive self-directed IRA.

Conservative IRA Investors Shouldn’t Settle for Less Than 2% ROI

You want to grow your retirement savings. Not watch it erode away to inflation. Inflation is the silent killer of your retirement savings account.

The long-term average rate of inflation is between 2% and 4% annually, based on the Bureau of Labor Statistics’ Consumer Price Index, one of the most common measurements of inflation. Since the end of WWII, the average has been 3.76%.

Just preserving the current value of your retirement account won’t happen even with a high paying savings account at 2.15%. The difference between the long-term inflation average and a high yield savings account still loses about 1.61% each year.

At the very minimum, a savings account must earn 2% to 4% just to stay even with inflation. More if you want to earn a little something on your money.

And conservative stock market investing isn’t much better. Generally, investing in an S&P Indexed fund is considered conservative stock market investing. The S&P 500 rate of return for the past 60 years (without any fees or reinvesting dividends) has been 1.85% after adjusting for inflation. Over the last 10 years, it has been 2.28%. Both long-term and mid-term conservative stock market investing consistently fails to keep up with the inflation average.

Keep Your Emergency Fund Separate

You might beat inflation slightly by picking a long term CD. A few online banks have 5 year CDs with APYs of 3%. These federally insured bank accounts lock up funds for a fixed period, so they’re best for money you don’t need for several years. But you need savings outside of long term CDs to cover emergencies.

An emergency fund’s purpose is not to beat inflation. It should be structured for easy access to money when you need it. A regular savings account is easier to withdraw money from than a CD or investment account.

A good rule of thumb is an emergency fund should cover three to six months of living expenses. But since it’s not keeping pace with inflation, you need to revisit that amount every year.

Conservative Self-Directed IRA Investors

Do you think of highly aggressive investors when you hear the words “self-directed IRA?” Does it conjure up thoughts of angel investors risking seed money with an inexperienced entrepreneur? Or buying risky rehab real estate in high crime neighborhoods? Or some get rich scheme?

The advantage of a nontraditional approach is you don’t have to bet on speculative investments. To the contrary, self-directed investors have more options and can choose their investments wisely. Many conservative investors move money from a traditional IRA or 401(k) stock and bond account into a self-directed IRA so they can protect their assets.

You may or may not agree that a diversified portfolio is a conservative portfolio. But diversification is another aspect of flexibility. You can at least investigate other diverse investments that may be appropriate for your conservative self-directed IRA.

Some successful business owners are conservative investors. They often don’t fit within the riskier investment box seeking a fast fortune. Still, they want tax breaks and protection under federal bankruptcy laws. Rather than a jet-set lifestyle, they want to pass legacy wealth to their heirs after enjoying the fruits of their labor.

Conservative Self-Directed IRA Example 

Ronnie is a 30-something engineer in our example. He has a conservative self-directed IRAs that he contributes to annually.

His conservative choice is to form an LLC wholly owned by his IRA. The LLC purchases rental properties for 100% cash. The primary financial objective is good cash flow. After a thorough due diligence, Ronnie chooses a small duplex for a first investment that he pays for with $60,000 cash.

This is how the duplex numbers work out:

Rent: is $550 for each side of the duplex, totaling $1,100 in monthly revenue.

Monthly expenses average $350 per month for maintenance, taxes, insurance, and occasional vacancy.

Net annual operating income: $750 ($1,100 – $350) X 12 = $9,000.

Annual return on cash: $9,000 / $60,000 = 15%.

All of the earnings are returned to the conservative self-directed IRAs tax-free each year. Each year, he contributes the maximum to the IRAs ($6,000). The total going tax-deferred into the IRAs each year is $15,000 ($6,000 + $9,000).

Making Your Money Work Better for You

In three years, Ronnie makes a similar $60,000 investment after the money has been earning a little interest in a savings or CD account in-between investments. He repeats this success again and again and again. The effect of compounding with more revenue coming in every time he invests in another duplex means each cycle is shorter. It shortens from 3 years, to just more than 2 years in the second cycle. That adds even more income and soon he is buying more than one duplex each year until he owns 24 duplexes.

In rough math, at $60,000 per duplex, he has invested $1,440,000. Each year Ronnie earns $216,000 in rent after expenses ($9,000 X 24). That’s a darn good monthly retirement income. And it could be all tax-free when he starts taking distributions at age 59 ½ if they had invested using a self-directed Roth IRA. Another option is conservatively leveraging the IRAs with non-recourse loans to purchase income-generating duplexes even faster.

That $216,000 is only the monthly income. It doesn’t include the accumulated wealth from owning the 24 duplexes ($1,440,000) plus the appreciated value over the years. There is little doubt that Ronnie will have plenty of legacy wealth along with income generating properties to leave his children and grandchildren after he fully enjoys the fruits of his labor!


I hope this conservative self-directed IRA plan inspires you to start growing your IRA nest egg today. The Checkbook IRA LLC is specifically and legally designed to keep you in compliance with IRS requirements. In the end, checkbook control of your IRA is a powerful tool for dramatically growing your retirement account but there are specific rules that you must follow to stay on the right side of the IRS code.

Have questions about a Checkbook IRA LLC? The experts at Nabers Group will help you get your retirement funds into your control, where they belong. Contact us here.

Disclaimer: These resources are provided as a convenience and for informational purposes only. They do not constitute an endorsement or an approval by Nabers Group LLC of any of the products, services, or opinions of any corporation, organization, or individual. Nabers Group LLC bears no responsibility for the accuracy, legality, or content.

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