Should I convert my traditional IRA into a Roth?

6 Replies

I used to have a "Real" job and contributed to my 401k as much as I could. When I quit and went into RE full time, I rolled over into a self directed IRA, NOT a Roth. (This was done to keep my income low as I continued to contribute as my kids were all going to school and that darn FAFSA.)

Now that my kids are out of school, I am considering doing the Roth conversion.  The lower Trump tax rates, expanded brackets and the bonus 20% pass thru deduction have me thinking this is probably the best time to make the conversion.

My problem / concerns are as follows:  

- I have just over $250k in my IRA (dividend paying stock) so the taxes owed would be HUGE.

- I have approx $1.2M net worth in RE and plan on keeping most of it as I retire so I do not foresee NEEDING the IRA balance to live.

- I am 52yrs old so I have some time to recapture but not that much (comparatively).

- The market is at an all time high so paying taxes now may mean if there is a correction, however slight, I am overpaying the tax

- I could pay the tax from current reserves but that would leave me almost naked on that front.  Perhaps a multi year conversion but that shortens my time to recoup etc etc etc

- I ASSUME the tax rate will only go higher from here as sooner or later there will be a changing of the guard in DC and the current Dem platform is higher taxes, especially for people like me.

- by the time I hit 70.5 and the RMD start kicking in, the balance could be close to or over $1m in the IRA meaning I could have an RMD of $75-$100k yr on top of my RE income, which, by then, will be sans the depreciation deductions, meaning HIGH TAX BILLS.

My questions are this;

- Is there a calculator that you can punch in your data and future assumptions and it gives you a recommendation or break even analysis.

- Do you bite the bullet now or spread out over 2+ years

- Do I just leave it and worry about it in 18 years or let the kids pay the tax when I die

- 1st world problems, I know, but I don't want to pay more tax than I have to and I DO want to leave as much as I can to MY charities and heirs and not the Govt.

Thanks for any suggestions or insight this great group of investors can offer.


@Tim Hoffman

Whether and how you should convert will really best be addressed in a conversation with your tax strategist.  If you are not in the highest tax bracket currently, then you want to look at how much you can convert in a given year and not bump up your marginal rated too much thereby.  A stepped approach over a few years will probably make good sense.

Here is a calculator that is good for roughing numbers.

You could also look to minimize the downside risk of a market correction by shifting some of the new Roth money to a truly self-directed IRA and into something like notes or property that will be more stable in value over time.

Hi @Tim Hoffman

What is your current tax bracket? If you are already at the top tax bracket, then there is no point in spreading out the conversion. You are 52 years old, and you have 30+ years of life expectancy, so I think converting to Roth is the smart move as then you will not get taxed on the rental income. Converting to Roth also allows you to perpetually keep the fund in the account if you don't need to use it. With normal IRA you HAVE to start taking distributions at age 70 (?) so if you have enough outside of your IRA then that's another reason you should convert.

Your tax rate may or may not be higher in the future. it depends on how large your "real job" income is vs your rental income is.  If your real job income is significant then when you retire your tax bracket may be lower.  If that's not the case, then again, there is no point in delaying the conversion. 

It's been many years since I last took a tax class, so I'm not 100% sure, but when your kids inherit your properties after you pass away, they receive it at step up basis (which means the "cost" will be upward adjusted to whatever the market value of the property is at the time of inheritance).  But I could be wrong or the laws may have change without being aware so I'd confirm with someone that's practicing individual tax. 

Hope that helps!

@Tim Hoffman

I am a big fan of the Roth IRA and the Roth SDIRA! In regard to Roth conversions, you should certainly follow @Brian Eastman advice and consult a specialist or your accountant. You do not have to convert all at once, you can discuss with your accountant how much to convert each year to minimize the tax burden. Keep in mind, when converting an asset in a self directed IRA you will need to re-title or amend the asset.

Originally posted by @Tim Hoffman :

 I DO want to leave as much as I can to MY charities and heirs and not the Govt.

Another strategy you might consider is the Qualified Charitable Distribution (QCD). You can roll money straight from your IRA to a charity. If you're over 70.5, it counts as your MRD and it never shows up as income to you. It is essentially an above-the-line tax deduction. Talk to your tax advisor to see if that might fit into your plans.

Best of Luck with Your Real Estate Investing!

I play what-if and convert traditional to Roth as best fits that calendar year.  

This year is not a good year for me to convert income-wise because I realized a rental sale, but 2 years ago was.  So I converted just enough to almost touch the next bracket up.  

You don't have to be all or none.  You can convert a portion that just allows you to remain in the same bracket for the year, provided you have the money saved for the taxes. 

Unless the goal is to eliminate the RMD, the older we get, the less benefit there is to converting at all.

Thank you everyone for the advice. I never considered a QCD but that makes a lot of sense. Partial conversions as the year and income dictate and whatever I planned on giving to my Church and other charities can stay in the IRA until the RMD's kick in and then that money goes there. A true Win-Win as I dont have to pay taxes today, the money continues to grow and the charity gets the full benefit. This is the beauty of Bigger Pockets, the knowledge that is so freely shared by everyone. Thank you again, it is very appreciated!