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When is the profit in your self-directed IRA or 401(k) NOT shielded from taxes? It may happen       far more frequently than you think. I’m Bryan Ellis. This is episode #306 of America’s largest, fastest-growing podcast for self-directed investors.

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Hello, Self-Directed Investors all across the fruited plane! Welcome to Self-Directed Investor Talk, the show of record for savvy, self-directed investors like you, where in each episode, I help you to find, understand and profit from exceptional alternative investment opportunities and strategies.

Lately there’s been a lot of news about Apple computer, as it’s stock has gone high enough to make the company worth more than a Trillion dollars, the first company to have achieved that lofty level. And there’s constantly news about AMAZON, as that stock has continued to zoom upwards in a meteoric fashion. But did you know that REAL ESTATE beats STOCKS… pretty easily… as a retirement investment… and I can prove that to you conclusively? In fact, I invite you to allow me to present the hard evidence to you that the core retirement investment strategy that Wall Street has taught all of us is fundamentally unwise and unsafe. And I’ll show you how to use real estate to get MUCH BETTER RESULTS. I’ll do that by way of a special FREE webinar for which there are still a few openings available. It’s called Real Estate Beats Stocks… EASILY, and you can register for it at no charge by visiting today’s show page… SDITalk.com/306… SDITalk.com/306 and click the link that says “Register For The Free Webinar Here”. But don’t delay… it’s coming up very soon and seats are filling up fast, so to get FREE access, go to SDITalk.com/306 now.

Hey… did you know that not all of the income you make in your self-directed IRA or 401(k) is inherently protected from taxes? That’s right. The distinction lies in the fact that, from the IRS’ point of view, there are two TYPES of income: EARNED income and UNEARNED income. We’ll call them ACTIVE and PASSIVE income, as I think those are more descriptive.

Oh yes… one more thing before we look at the distinctions…

I’d like to offer a sincere THANK YOU to an iTunes listeners who uses the handle Jaywk007. He gave this show a 5-star rating and a really nice review that says “I just started listening to Bryan’s podcast and so far I think it’s awesome… I wish I had found it a long time ago!” Thank you, Jay… I really appreciate that!

And for your entertainment, folks… in tomorrow’s exciting episode, I’ll read to you a recent 0-star review I received. This show has 471 ratings on iTunes right now, which is HUGE… and of those, 450 of them are 5-star. But hey… some people can’t take the heat, and I’ll share one of them with you tomorrow to give you a nice chuckle.

Ok… active income and passive income. That’s a massive, crucial distinction, and here’s the reason why:

When your retirement account generates what’s called PASSIVE income… things like profits from the sale of stock or income from rental properties or interest from a CD… that kind of income is exactly what your retirement accounts was designed for, and consequently, that kind of income – passive income – is where the tax benefits come into play which you BELIEVE to be fundamentally associated with your IRA or 401(k).

But as it turns out, there’s nothing fundamental about those tax benefits. Because if another type of income – called ACTIVE income – is generated in your IRA or 401(k), then look out, because you’ve got a rude awakening headed your way, that rude awakening being, of course, that IRA’s and 401(k)’s do nothing to help your tax situation when the money in question is EARNED or ACTIVE income.

What is active income? According to a definition offered by our pals over at the IRS, It can be one of two different things, and both are pretty simple. First is active income happens whenever you work for someone and they pay you. Easy-peasy. Second is when you own a business or a farm which pays you.

So how does this relate to your IRA or 401(k)?

One very common example of unexpected EARNED income in an IRA or 401(k) is through flipping real estate. Whether you think of real estate flipping as a business or not… it is. And as such, the IRS tends to see the income generated from real estate flipping as ACTIVE or EARNED income if you do more than 2 or 3 of them per year in a retirement account.

That’s not specific to real estate. If you’re actively buying and reselling just about any type of asset… apparently with the exclusion of publicly traded stocks… that will be considered a business that you’re operating through your retirement account, and will, as such, be taxable.

There’s at least one other way to generate income in an IRA that has to do with taking on debt in an IRA, but we’ll look at that another day.

Now a quick note of distinction: You hear me regularly address the issue of “prohibited transactions”… a class of compliance errors that, when committed within your self-directed IRA, renders the thing totally destroyed and, quite probably, slashed in value by 40-60% or more. Those are things like allowing your IRA to buy assets from you personally, etc.

But I want to make it clear to you that performing activities in your IRA that generate ACTIVE income is NOT the same as a prohibited transaction. ACTIVE, or EARNED, income is TAXABLE in your IRA or 401(k)… but it’s not a compliance problem… it’s NOT prohibited.

In fact, it can sometimes be a useful thing to take the hit on those taxes just so you can blow up the size of your retirement account more quickly. But we’ll look at that another day, too.

Folks, thanks for listening. If you’re learning something, please stop by iTunes and give us a nice rating and review. And if you have a suggestion for a topic you’d like me to address, drop a note to me at [email protected].

My friends, invest wisely today and live well forever!

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