Today’s REI Classroom Lesson

With tax time right around the corner, Clay Malcolm chats with us today about some tips to consider for both the past and upcoming year.

REI Classroom Summary

Clay recommends looking at your accounts and analyzing if you’re maximizing your opportunities within your investments.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Clay: Hi, everybody and welcome to the REI Classroom. My name is Clay Malcolm with New Direction IRA, and today we’re going to be talking about tax time tips for real estate IRA investors.
Mike: This REI Classroom real estate lesson is sponsored by, FlipNerd’s private investor coaching program and your blueprint to investing success.
Clay: Okay, tax time tips. Remember that your deadline this year, so your 2017 for tax year 2016, is April 18th this year so, if you have a few extra days. And one of the things that you want to be thinking about I think, as you move toward the deadline is what’s happened to you that year and what tools do the accounts that you have offer in terms of making that better from a tax perspective?
So we’ll take the traditional and Roth kind of as the basis first. Keep in mind that for most of us, if we can contribute to a traditional IRA we get a tax deduction for that. So if you made a lot of money in a given year and you want to knock some of that off then obviously you might want to look at your accounts and see if you have the ability to make a contribution so that you get that tax deduction.
The other thing you might be thinking about is tax rates. What you’re having as your tax rate this year as opposed to what you’ll be having as your tax rate in other years. The deduction obviously might help you more in one year than another, so that type of analysis, even though it’s a little bit of a number crunching . . . might be a little bit daunting for some of us, it’s one of the ways that you use that tool to its maximum advantage.
Let’s talk about Roth. So for a Roth you are taking this speculation about your tax rates out for the most part with the exception of this year. So it’s after tax money, and in a lot of cases, even if you’ve contributed your personal max for let’s say a 401K or traditional, and you’ve already taken your allowable amount for deductions, you can still contribute to your Roth. So you might want to think about, am I making the most contributions that will help me later on? So in some cases, a Roth gives you an ability to contribute a little bit more because it’s not tax deductible.
The other thing you might think about in terms of those two dynamics is Roth conversion, so moving from a traditional to a Roth. So obviously thinking about is this year where your income tax rate is very high or very low, might determine whether this is a good year for conversion. Because in a lot of cases the idea behind Roth conversion is converting in the year where it will have the least tax event, least high taxes, so that you take the speculation out later. So when you take qualified distributions from Roth obviously, you’re tax-free.
So all of that kind of, and some of it is speculation, but a lot of it has to do with what happened in your year this year. So taking a look, did I take a loss on another investment? And so I have a loss that might offset what I have to pay in terms of Roth conversion. I’ve certainly seen that strategy used before.
So all of these things in terms of examining what your tax bracket is as well as what’s happened to you financially during the year can be addressed up until April 18th of this year. So you have a little time to strategize, and I certainly encourage you to talk to your CPA or financial team about it.
The other thing that you want to consider is distributions. If you’re over 59 and a half are you going to take distributions this year? Certainly, between 59 and a half and 70 and a half for traditional IRAs, you have carte blanche, you get to decide.
Keep in mind that distributions can be either in cash or in-kind, so you can distribute hard assets or alternative assets in-kind, so you don’t lose control of them. And you might want to think about requirement of distributions if you’re 70 and a half or over, a few things that think about there.
If you are 70 and a half or over, or you’re starting to get into requirement of distributions how are you going to do that? Remember that if you have multiple IRAs, your entire requirement of distribution for all your IRAs can be made out of one account or it can be proportionally out of each account. You get to make that strategy decision.
So there are things to be thinking about in terms of your requirement of distribution at this time of year for this tax year 2017. And there is a couple ways to skin the cat there, and that’s a terrible expression, but you understand what I’m talking about.
So as tax time approaches, make sure to evaluate your past year and what’s going to be happening in your tax year this year. And do the analysis, some number crunching and that may lead you to be able to save yourself some tax money. Thanks for joining us on the REI Classroom, we’ll see you next time.
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Clay Malcolm
Clay Malcolm is the Chief Business Development Officer for New Direction IRA. In this role, he oversees marketing, education programs, and facilitates the training of business development and client representative teams. Clay has shared his expertise regarding self-directed IRAs and HSAs at speaking engagements across the United States. Currently, he teaches continuing education classes for CPAs, CFPs, and real estate professionals as well as presenting informational sessions for retirement investors looking to acquire precious metals, real estate, private equity, and more. Clay received his Bachelor of Science degree in communications from Northwestern University.