Non deductible IRA -> converted to Self Directed Roth?

7 Replies

Hi, I don't even know if this is possible.

I do not qualify for a Roth IRA or a deductible IRA.

I believe I can open up a non deductible IRA and convert it over to a Roth and there is no income requirement (cap) to do so.

Can so also do the same to a self directed Roth?

I was hoping to see if I can open up a non deductible IRA and convert it to a self directed Roth. Has anyone done this or have some information they can share on the process? Thanks!

@Esther Thomas

another options you may want to consider is Solo 401k, which has Roth provision, but does not have income restriction on contributions. Also the Roth contribution limit is much larger compared to Roth IRA - $17,500 per year!

and as far as your question, yes, you should be able to do that, the steps are as follow:

  1. Make non-deductible contributions to a Traditional IRA
  2. Convert that into Roth IRA
  3. Transfer that Roth IRA into self-directed Roth IRA

What are you planning to invest in? It might make sense for you wait until you build enough funds before rolling over to self-directed. The cost of maintaining self-directed IRA is higher and if you are unable to invest the small amount of money you have in your IRA because of the yearly contribution limitations of $5,500 you should wait before doing the rollover.

thanks @Dmitriy Fomichenko for your reply. So I think I'll do step 1 and 2, and sit on it until I know if I want to leverage it in a self directed Roth. No idea on how long it takes to the the conversion, if it's a matter of days, weeks, etc.

I'll look into the Solo 401k as well. Thanks!

@Esther Thomas you are welcome!

Both the conversion and a rollover is a matter of days, you will need to complete a form and custodian will take care of the rest.

Esther, please keep in mind that if you plan to leverage your Roth IRA, you'll need a non-recourse loan to do so. Typically non-recourse lenders require 30 - 50% down, as well as a cash reserve. They also will not lend on certain types of property, including raw land and mobile homes. Finally, leveraging your IRA to purchase RE is going to kick off a tax called UBIT. Roughly, it's tied to the percentage of income generated by the % leveraged. Example, if your IRA finances 40% of the real estate purchase, then roughly 40% of the net income generated by that property will be subject to UBIT, which is taxed at trust tax rates. You should consult with an accountant to determine what impact this may have on your return on investment.

thanks @Doreen Chaisson , I definitely need to do some more research before pulling the trigger on any of this. Just trying to gather info to figure out if it's the right thing to do for me. Thanks again!

Originally posted by @Esther Thomas :
Hi, I don't even know if this is possible.
I do not qualify for a Roth IRA or a deductible IRA.

I believe I can open up a non deductible IRA and convert it over to a Roth and there is no income requirement (cap) to do so.

Can so also do the same to a self directed Roth?

I was hoping to see if I can open up a non deductible IRA and convert it to a self directed Roth. Has anyone done this or have some information they can share on the process? Thanks!

Esther,

Yes, you certainly can do that, and it is done frequently. It is a less than perfect solution, IMHO.. @Dmitriy Fomichenko has the better idea: open up a Solo or Independent 401K. There are no income restrictions on a 401K. You could earn $1M per year and still contribute. Your contribution limits are higher, over three times as much can be contributed to a Solo 401K than a Roth IRA.

Furthermore, Solo 401Ks are much handier for you, the investor as there are no third party custodians that can slow transactions down, and thus there are no custodial fees. You can borrow your own retirement money out for opportunities that you want to profit from personally, and the hidden tax that occurs in Roth IRAs (Unrelated Business Income Tax or UBIT), is virtually eliminated within a 401K. If you browse Dmitriy's posts or my posts, this will give you a running start on 401Ks.

Keep thinking outside the box!

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