All Forum Posts by: Max Gallagher

Maybe a few days late to this post but thought I could provide some clarity as a Certified Financial Planner. I'm a big fan of Mega Backdoor Roths if your plan allows for it (ie. automatic in-plan Roth conversions). 

In a head to head comparison of pure after-tax growth, MBDR wins as all of the earnings on contributions are tax free whereas earnings in a taxable account are subject to capital gains upon sale. For example, say you contribute $30k via MBDR to your Roth 401(k) this year and over the next 15 years it grows by 8% annually to ~$100k. If this $30k was invested in the Roth 401(k) you could withdrawal $100k with no tax consequences. If this $30k was instead invested in a taxable brokerage account, you'd pay capital gains taxes on the $70k of growth and be left with a tax bill as high as $14k. That's a sizeable tax bill that can be avoided just by investing in a different type of account. 

Now we know there are no free lunches, so it's important to understand the tradeoffs. Withdrawing from retirement accounts in your 40's is not as easy as made out in your post and pointed out in some replies.. there likely would be a 10% penalty associated with withdrawals even if its contributions. While you might have more flexibility in avoiding the penalty if structured as a 401(k) loan or a hardship withdrawal, I would only recommend contributing to a Roth if you have confidence that you won't need to touch it until 59.5. 

Seeing as you mentioned you have very little liquidity in after-tax and savings accounts, I'd likely recommend focusing on building up a buffer of accessible and liquid dollars in an after-tax brokerage account prior to maxing out a Mega Backdoor Roth. It also doesn't need to be all or nothing.. if you have the ability to save an extra $30k per year, you can save half of that into a brokerage account and the other defer into a Roth 401(k) via MBDR. My main priority (knowing very little outside of what you shared) is to make sure you have funds liquid and available so that you may weather a potential emergency. 

What is the value of the property and cost basis? I'm assuming your mother's income is very low, do you have a sense of what the tax impact might be if you sold outright, not via a 1031? Remember there is an exclusion available of $250k of capital gains for the personal residence of a single filer (assuming 2 of the past 5 years she's lived there). If she's married or spouse passed away within the past 2 years she could likely claim a $500k exclusion. 

Obviously there are a lot of interconnected factors at play here.. real estate, Medicaid/Medi-Cal eligibility, taxes, and estate planning. Has the AZ property been used as a rental at all up to this point? The exchanged property needs to have been used as an investment property and the intent needs to be to use the new property for investment purposes as well.

Instead of your mother doing her own exchange, it sounds like you're thinking of ways to be gifted the property, rent it, and do a 1031 exchange of your own down the road? In this scenario, it's important to consider that there is a five-year look back with Medi-Cal and any assets transferred (including through a quick claim deed) within five years of applying for Medi-Cal could be penalized, potentially delaying or denying eligibility. It's also important to consider that you would be gifted the basis of the property and lose the ability for a step up that would otherwise be available if inherited. Depending on your long-term plans, the tax impact of losing that step up should be balanced with higher healthcare costs. Nobody wants to pay higher taxes or medical costs but sometimes its worth picking the less costly of the two and calling it a win. 

There might be exceptions to the asset transfer rules if you can demonstrate that you provided care for your mother that allowed her to avoid institutionalization for a certain period. This is complex and requires meticulous documentation and well beyond my area of expertise. This is something you MUST discuss with an elder law attorney specializing in Medicaid/Medi-Cal.

Based on what I'm reading an exchange to another piece of real property under your mother's name is going to raise red flags with the IRS if the AZ property isn't showing rent on a recent tax return and gifting will potentially cause complications with Medi-Cal eligibility.

Let me know the details on the AZ home (FMV, cost basis, rental history) and I can point you in the right direction.

Hi Fred - CFP here. Great question and always worth getting a second opinion.. especially when it comes to inherited IRAs. There might be some confusion around the 60-day rollover rule which allows you to move money from one IRA/401k to another (both pre-tax and Roth). This gives investors some time to complete a rollover and, in some rare cases, can be used as a source of short-term liquidity.

Unfortunately, inherited IRAs are not treated as your own and do not fall under the 60-day rule. As you mentioned, the IRS requires distributions (RMDs) so they can get their money in a timely manner. Rolling funds from an inherited IRA into a pre-tax IRA or converting to Roth is not allowed.

All that said, depending on the size of your RMDs, liquidity needs, and total income, you may consider making deductible contributions to your own IRA ($7k limit, $8k if above 50). While it doesn't directly offset the income picked up from the inherited IRA distribution on your tax return, this could partially or fully offset the tax impact and be a completely legit way to accomplish sort of a backdoor rollover.

For example.. Let's say you inherited a traditional IRA and take a $10,000 distribution this year. That $10,000 is generally taxable income. Separately, if you're eligible, you might be able to contribute $7,000 (for 2025 if under 50) to your own traditional IRA and deduct that amount from your income. While they are two separate transactions, this would essentially leave you with $3k of net taxable income. 

Remember there are income limits, contribution limits and other personal factors to consider. Consult with an expert or feel free to send me a private message to talk details. 

Hi All -

A friend and I just opened escrow on a 3 unit (3br - $1500 in rent, 2br - $1350 in rent, & 1br - $850 in rent) property in Los Angeles, CA. The property is rent controlled and all units are currently occupied. Our goal is to move into the 3br unit (most space, largest deviance from market rent: ~$2100) but the current tenants have been there over a year. All interactions with them so far have led us to believe they will not voluntarily leave without money offered or legal action.

I’m looking for negotiating tips or practical applications of the new Rent Stabilization Ordanance (RSO). For example, the law requires a payment of $15,900 to the tenants for no-fault relocation (qualified tenants due to minors; we qualify for mom and pop relocation amounts), but has anyone had success paying less? We must also live at the property for two years and sign declarations with the city immediately, after one year, and after two years stating that we have and still are living in the unit. What would happen if we no longer want to live in this unit after a half or full year?

Resources (sample):

https://hcidla.lacity.org/Relocation-Assistance

https://hcidla.lacity.org/sites/default/files/documents/declaration_of_intent_to_evict_for_landlord_occupancy.pdf

Questions:

• -Does anyone have experience negotiating with tenants (cash for keys), without hiring an attorney?

• -Does anyone have experience with no fault evictions in rent controlled areas (new RSO) using an attorney?
• -Any general thoughts or specific tips that may help us in this scenario?

I appreciate any and all feedback. Thank you!