Roth IRA Contributions: Transfer from Self Directed IRA?

Question

Hello BP!

Fairly new to real estate investing, just bought a condo this past year with my girlfriend (and not looking forward to doing my taxes) and am currently in the "save money for additional investment while I learn as much as I can" phase.

My question is this: I have 3 investment accounts with Fidelity: a standard investment account, a self directed IRA (from an old employer), a Roth IRA (all with roughly equal amounts).  I haven't contributed anything to my Roth IRA or my self directed IRA for the 2015 tax year, aside from my employer IRA which I cannot access right now.  I've heard its good to max out the Roth IRA contributions while I'm still young (26).

I have enough to max out the contribution for the year if i were to transfer from my regular IRA. I know I'll have to pay the income tax on it now, but is that a wise investment?  I also have enough in savings to max out my roth IRA but that would be pretty limiting in terms of liquid capital.

Lastly, if I do make the contribution to my Fidelity Roth IRA, can I use that to invest in Real Estate?

Should I make a small contribution of cash to my Roth IRA before the end of the tax year? Should I continue to save my cash to eventually invest in additional property?

Thanks in advance for the advice!

Mark Nolan · Answer

@Tom Squire

If you want to invest your IRA funds in real estate, you will need to find a different IRA custodian than Fidelity. A company called IRA Services Trust Company in the San Francisco area offers self-directed IRAs.

The following information will help you to understand the differences between a Traditional IRA and a Roth IRA.

• Roth IRAs grow tax free. 
• Traditional IRAs grow tax deferred
• Contributions to Roth IRAs are made with after tax funds. 
• Contributions to Traditional IRAs are made with pretax funds. 
• Roth IRA contributions may be withdrawn at any time tax and penalty free. 
• Traditional IRA distributions are subject to taxes and generally a 10% early distribution penalty if made prior to reaching age 59 1/2. 
• Roth IRAs are not subject to required minimum distributions (RMDs) whereas Traditional IRAs are subject to RMDs.

Dmitriy Fomichenko · Answer

@Tom Squire

given your young age of 26, Roth IRA makes sense. You have more years to grow your wealth tax-free as opposed to someone who was 46 year old.

Let's say that you contributed $50K into your Roth over the course of several years and stopped making any additional contributions. Then in the course of the next 30 years you prudently invested your Roth IRA funds and grown it to $1MM. The entire balance and all future distributions would be tax-free for the rest of your life.

I think you should invest in real estate under your own name when you are able, but using Roth IRA as part of your investment strategy can be very powerful (because you have time on your side).

Nick Sundstrom · Answer

Hey Tom,

Just wanted to chime in about IRAs.

You had mentioned funding your Roth IRA from your Traditional IRA, this is called a Roth conversion and doesn't have limitations as to the amount you do, but as you mentioned will be taxable as ordinary income.  Conversions are not subject to the 10% early distribution penalty.

The contribution amount for 2015 is $5,500 and is for new contributions, so new money going into your Roth.  New contributions come from your personal funds which have already been taxed.

Just wanted to differentiate between making a new contribution and doing a conversion.

Nick

Tom Squire · Answer

Thanks for the reply, good to know Fidelity doesn't service real estate in IRAs.

If I were to take the funds from the IRA and put them in the Roth IRA, I would have to pay the 10% early deduction, then I would have to pay income tax on the 'earnings' from the transfer. Does this make sense at my age to pay the double tax on the money or should I leave the money where it is?

Secondly, where is the best place to keep a future real estate investment? Sheltered in a IRA or Roth IRA, or just in my own name.  I would eventually like to have the properties cash flow to sustain a passive income.  (I think I may have answered my own question here, keeping it out of my retirement accounts to keep the income useable for reinvestment/passive income).

Roth IRA Contributions: Transfer from Self Directed IRA?

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