Today’s REI Classroom Lesson

Clay Malcolm talks with us today about both traditional and Roth IRAs, including tips for when to switch from traditional to roth.

REI Classroom Summary

Listen in as Clay shares strategies to use over the course of your investments with your Traditional and Roth IRA.

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 estateinvesting industry teach you quick lessons to take your business to the next level. And now, let’s meettoday’s expert host.
Clay: Hi, everyone. My name is Clay Malcolm from New Direction IRA, and I’ll be your host on the REI Classroom today and we’re going to be talking about traditional IRA to Roth IRA convergence for real estate investors.
Mike: This REI Classroom real estate lesson is sponsored by
Clay: As some of you may know, when you have a traditional IRA which is pre-tax money in and then taxed on the way out when you take a distribution, you can, in some cases, convert that money to a Roth format which is post-tax money in and tax-free on the way out. So they’re basically different tools and sometimes one is the better one and sometimes the other. It really depends on what you’re going to invest in, what the rest of your financial world looks like, your timetable, and to some extent, the assets that you’re actually going to invest in. So it really is an overall equation looking out what will be the least amount of taxes that you’ll pay throughout the entire sequence of investment.

Now, one of the things that is important for real estate investors to know right at this time is that the rules for traditional to Roth conversion are very liberal. There are no restrictions on how much money you’re making as an individual or even as a couple if you are married, and there’s no limitation on how much money you can convert. Now, these rules do change periodically so this opportunity may or may not be around for any number of years. It really just kind of depends on the legislature.

So the interesting thing that I see are our account holders, especially real estate investors, considering is a few things. So one is, if you already took a loss on a deal on your personal finances, that may mean that that could be a year where you do a traditional to Roth conversion, because when you do that conversion, the gross amount of dollars that you are converting from pre-tax money to post-tax money goes on your income for that year and gets taxed at that point. Now, if you take a qualified distribution later on, of course, that’s the tax at the conversion point is the last tax you’ll ever pay on it.

So if you took a loss on one of your other investments in a year, that might be a year that you make a conversion or, I hear our account holders say that they’ll take a . . . do a conversion in that year because, then their overall tax burden will be about the same as it would be normally.

A couple other things I hear. If somebody in a traditional IRA, when you hit 70-and-a-half, you have required minimum distributions. So you have to start taking little pieces, percentages of your IRA in distribution form each year thereafter. But if your financial circumstances are such that you don’t actually need the money or you want to deploy it in another way, I hear our account holders telling me that they will at 65, 69, 70, even beyond 70-and-a-half make a traditional to Roth conversion so that they don’t have to chip away at that account and the account can continue to produce rental returns.

In other words, they keep the cash flow going but the asset itself is never really threatened because you don’t have to take required minimum distributions. There are certainly other strategies as well that I hear. So one is, “I want to move most of my portfolio from traditional IRA to Roth IRA and I’m going to do it over a period of years,” because of course, there is a tax event for each of those conversions. And so in that particular case, the account holder is saying, “I’m going to retitle this property or properties a little bit at a time so that I don’t have to pay the whole tax burden all at once.”

I also hear folks sometimes say, “Well, I’m going to get into an investment or real estate speculation deal, or something like that that has an opportunity for a very high return in comparison to how much I’m investing.” And so, in some cases, they will go ahead and make the conversion, pay the tax on it so that it’s a Roth investment so that if it does hit big, the profits that are made, the earnings, you’ll never have to pay tax on as long as you take a qualified distribution.

So there are all kinds of considerations when you’re thinking about traditional to Roth conversion. I think the important thing is just that you really have a lot of freedom in that regard right now. And especially with assets like real estate that maybe . . . especially ones that are cash-producing, thinking about that cash flow and what you do with it and how you deploy it can really be a powerful tool. So in this time, when the legislation allows you to make conversions with the freedom that you can right now, this may be a good time to think about an overall strategy for your IRA-owned real estate, what you’re going to do with it in the future, and what tax format it’s going to be in.

Thanks for joining us today. We’ll see you next time.

Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real
estate investing, please visit to learn more.

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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.