Do you have money collecting dust in your retirement account? According to CNBC, 1 in 5 Americans have dormant funds in their 401(k).

Putting your money to work for you is the easiest way to reach early retirement.

The power of passive income is putting the savings you’ve built up through your pension and earnings to generate cash flow.

Let’s take it one step further by combining the tax benefits of retirement accounts with passive income investments to compound the earnings in your portfolio.

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Using a Tax-Advantaged Retirement Account for Investment

Tax-advantaged retirement accounts like Thrift Savings Plans, IRAs, and 401(k)s, offer excellent tax benefits to help individuals save for retirement.

However, most traditional retirement plans limit investments to stocks and bonds. This provides little wiggle room to generate passive income for your retirement.

Only self-directed IRAs allow veterans to invest their retirement funds directly in passive income vehicles, such as rental properties, deeds, and more.

When you invest in tax liens, earnings come from the interest applied to the lien

Benefits of Investing with a Self-Directed IRA

Self-directed IRAs come with the same tax benefits as a Roth IRA but allow you to invest in alternative assets.

For this reason, many people, such as Peter Theil, have been able to leverage these retirement accounts to produce massive, multi-billion dollar portfolios.

Here are seven reasons to use a self-directed IRA to invest a portion of your savings in passive income instruments.

1. All earnings are collected tax-free in your self-directed IRA.
2. Gain access to a large pool of dormant savings sitting in your retirement account.
3. Invest in assets you have familiarity with, such as real estate or promissory notes.
4. Diversify your portfolio with multiple streams of income.
5. Earn a second, active income stream that can be distributed tax-free at retirement.
6. Build generational wealth that can be passed down to heirs with proper estate planning.
7. Compound earnings faster thanks to the tax advantages of your retirement account.

9 Passive Income Strategies Veterans Can Leverage for Retirement

These passive income instruments allow veterans to generate income via cash flow, equity, trading, or dividends. You may find that they require some active management but are perfectly suited for second income streams.

1. Rental Properties

Rental properties offer multiple income streams, including active rent payments made by tenants and asset appreciation over time. Building wealth with rental properties may take a more patient hand, but it can quickly compound if you continually reinvest your earnings.

We recommend using your self-directed IRA for real estate because you won’t have to touch your savings to make a down payment. Instead, you can access funds sitting dormant in the stock market.

Plus, you’ll never have to worry about exploiting 1031 exchanges since self-directed IRAs are not taxed at withdrawal (until after 59½).

Note: IRS Regulations prevent SDIRA owners from working on properties they own through their SDIRA. Contractors must be hired instead.

2. Private Equity

Private equity investments give investors shares of a property that can later be sold at massive appreciation. Investors like Thiel have exploited this strategy to generate exponential returns on their investments using their SDIRA.

Use your SDIRA to fund profitable startups or assist other veterans in your community with projects.

3. Dividend Stocks

Dividend stocks provide investors with a way to generate income from their investments while also participating in potential capital appreciation. Dividend payments are typically made quarterly, although some companies may offer monthly or annual dividends.

4. Peer-to-Peer Lending

Private peer-to-peer lending platforms enable individuals to lend money directly to borrowers, cutting out traditional financial institutions. Veterans can participate in this alternative investment avenue, earning interest on their loans and supporting fellow citizens. With careful research and due diligence, peer-to-peer lending can become a reliable source of passive income, contributing to a stable financial future.

5. Wholesaling

Real estate wholesaling is a real estate investment strategy that involves finding and securing properties at a discounted price and then quickly selling or assigning the rights to purchase the property to another investor or buyer. This process is typically executed without the wholesaler actually taking ownership of the property. Instead, they act as a middleman, connecting motivated sellers with potential buyers and earning a fee or profit margin for their efforts.

6. Oil and Gas Royalties

Similar to dividend stocks, oil and gas companies allow investors to earn royalties or profit shares from energy production. In this especially volatile market, veterans have the opportunity to make massive returns without paying a dime in taxes.

7. Tax Liens

Tax lien investment involves purchasing tax liens placed on properties for unpaid taxes. Liens are purchased at auction and investors can collect repayment of the liens at interest over several years or assume ownership of the property if the lien is not paid. These properties can then be held for potential rental income, resale, or other passive income strategies.

8. Cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum offer several ways to earn passive income via asset appreciation, staking, dividends, lending, and more. SDIRAs are the only retirement account that allows you to purchase cryptocurrency.

9. Commercial Leasing

Commercial leasing offers several investment opportunities, including leasing to businesses, farmers or even buying up self-storage space. It’s similar to rental properties but requires much more due diligence, with a higher rate of return.

Top Tips for Implementing Passive Income Strategies for Retirement

  • Rollover Funds to an SDIRA: Roll over your retirement funds from a TSP, 401(k), pension, or IRA to your self-directed IRA to begin investing. Rollovers are tax-free!
  • Start Early: The sooner you begin investing, the more time you have to grow compound interest in your account.
  • Diversify Your Portfolio: Diversify your retirement portfolio with different investments and divert a large portion of your total investments into your retirement account.
  • Seek Professional Advice: Consult with financial advisors or experts to make informed choices and become better educated.
  • Be Patient: Passive income takes time to build; stay committed and patient, and you will see the fruits of your labor start to flourish.

    FAQs

    What Is a Self-Directed IRA

    A self-directed IRA (SDIRA) is an individual retirement account that allows you to invest in alternative assets. SDIRAs are managed by custodians–as opposed to traditional depositories–which may be active or passive, depending on your preferred investment strategy. 

    Which retirement accounts offer tax benefits for saving toward retirement?

    Tax-advantaged retirement accounts such as Thrift Savings Plans, IRAs, self-directed IRAs, and 401(k)s offer excellent tax benefits for retirement saving.

    Can veterans invest their retirement funds in passive income vehicles other than stocks and bonds?

    Yes, only self-directed IRAs allow veterans to invest their retirement funds directly in passive income vehicles like rental properties and deeds.