A Good Day to Convert to a Roth IRA

If you’re a real estate investor who took a loss this year, it might be a good time to consider a Traditional to Roth IRA conversion. 

Patricia McCrystal
June 25, 2015

The right time to make a conversion from a Traditional IRA to a Roth depends on several present and future factors that are unique to every individual investor's life. With a Roth IRA, cash is contributed "post-tax", meaning the contribution is made with taxable earnings for that year. This cash then buys assets (stocks, real estate, gold, etc.) on a tax advantaged basis. Assets can be bought, sold, or traded within the IRA without and without affecting the IRA holder's personal taxes.

With a Traditional IRA, cash is contributed "pre-tax", meaning the contribution is taken as a tax deduction from earned income for that tax year. This cash can then buys assets (stocks, real estate, gold, etc.) on a tax deferred basis. Like a Roth IRA, assets can be bought, sold, or traded within the IRA without incurring capital gains tax, and without affecting the IRA holder's personal taxes.

When you reach 59.5 years of age, you can begin to withdraw from a Traditional IRA without penalty. You then pay taxes on the amount withdrawn. Early distributions may be taken from a Traditional IRA without penalties for unusual circumstances like a first home purchase, or certain medical expenses.

A key incentive behind opening a Traditional IRA is the projection that you will be in a lower tax bracket when you retire, and that your initial contribution will have grown on a tax deferred basis. Most 401(k)s, 403(b)s, Thrift Savings plans, and 457s are within the same tax status as a Traditional IRA. 

One strategy behind converting from a Traditional IRA to a Roth lies in the projection that your tax bracket may be the same or higher upon distribution than at the time of contribution. Because Roth contributions are taxed when they enter the account, it could be beneficial to open a Roth IRA account when your anticipated yearly income is going to be less, and therefore your tax bracket is lower. 

If you made some less than successful real estate investments or suffered a rental loss this year, you may be able to turn your loss into a gain by paying lower taxes on your contributions, and eliminate speculation on your tax burden at the time of distribution. Roth IRAs are also popular with clients who anticipate a large return on their assets. If you think that fix and flip is going to rake in the big bucks down the road, you may choose to avoid paying taxes on the return by paying taxes on the initial contribution with a Roth IRA. 

Another benefit of the Roth IRA is the account holder’s ability to withdraw the principal amounts (your contributions) at any time without penalty or tax liability. When you reach 59.5 years of age, you can begin to take a distribution from the account (investment earnings included) without penalty and without taxes, as long as the account has been open for 5 years. Unlike a Traditional IRA, there are no Required Minimum Distributions (RMD) with a Roth IRA.

Both Traditional IRAs and Roth IRAs offer a unique array of advantages and conditions. The account that will best represent you and your retirement goals is wholly dependent on several present and future factors exclusive to your life as an investor. However, converting funds into a Roth IRA can be a silver lining to a particularly down year for real estate investors. Learn more about investing in real estate with your self-directed IRA at New Direction IRA's real estate page. And as always, happy investing!

Roth IRA Rules and Comparison

Since its creation in 1997, the Roth IRA has become a popular retirement solution for many investors. This popularity is largely due to the account’s unique advantages. While the Roth IRA isn’t the only way to plan for retirement, knowing its benefits can help you determine what kind of role the account can play in helping you prepare for your future.

Source: IRS.gov

 The first and foremost benefit of a Roth IRA is the account’s tax structure. A Roth IRA requires that contributions to the account occur with funds that have already had taxes taken out of them. This structure differs from a Traditional IRA gets funded with contributions be made with pre-tax funds. While you do have to pay taxes on funds that enter the account, any gains or earnings made by the funds in your Roth IRA are allowed to grow tax-free. Qualified distributions, funds withdrawn from the account after age 59.5 and after the account has been open for at least 5 years, are also tax-free.

Like a Traditional IRA, a Roth IRA can be funded through a contribution, transfer, or rollover. Unlike a Traditional IRA, the contributions made to a Roth IRA can be withdrawn at any time without penalties or taxes. These contributions are currently limited to $5,500 annually for individuals under age 50 and $6,500 annually for individuals over age 50. Income limits also apply to Roth IRAs. In order to be eligible to contribute to a Roth IRA, you must have earned income at least equal to the dollar amount contributed to the account. Individuals or married couples whose Modified Adjusted Gross Income exceeds certain IRS limits are also ineligible to contribute to a Roth IRA.

A Roth IRA can also be funded in a fourth way, through a conversion. This process involves taking a non-Roth retirement account- Traditional IRA, SEP IRA, SIMPLE IRA, 401(k)- and converting it to a Roth IRA by paying income taxes on previously tax-free account contributions. Currently, there are no limits on the amount of funds that can be converted to a Roth IRA. While converting non-Roth funds can help you take advantage of the benefits of a Roth IRA, this process does start a five-year requirement for qualified distributions on the converted funds. 

Beyond these benefits, the Roth IRA contains other advantages. Unlike non-Roth IRAs, you can continue to contribute to a Roth account after age 70.5. You are also not required to take a yearly minimum distribution from a Roth IRA after reaching age 70.5. Your Roth IRA can also help you purchase a home. The IRS allows a lifetime maximum of $10,000 that can be withdrawn tax and penalty free from the Roth account to purchase a principal residence for the account holder.

While the Roth IRA has many advantages, it is important to know how your current financial situation and retirement goals factor into the equation. Working with your financial team can help you determine how best to utilize a Roth IRA to realize your retirement dreams.

Holding Alternative Investments in a Roth IRA

The typical stereotype when opening an IRA account is that all underlying investments must be exchange traded stocks, bonds, and mutual funds. Stock market volatility frequently intimidates retirement investors to the point that they simply do nothing and forego crucial retirement planning. Roth IRA account owners will be pleased to know there is an entire spectrum of alternative investments unrelated to the stock market that can be held under a ROTH umbrella. 

Before opening a Roth IRA with the intention of holding alternative investments, be certain that your intended Roth IRA custodian is willing to work with you. The most common type of custodian allowing alternative investments specializes in what are called “self-directed IRA accounts.” Self-directed IRA providers are a small but growing niche. Let’s take a look at the applicable Roth IRA rules with regard to acceptable and prohibited alternative investments.

Acceptable Roth IRA Alternative Investments

A common alternative investment held in Roth IRAs is real estate. Just about any type of real estate can be held in a Roth IRA including single family homes, apartment complexes, and commercial buildings. It’s important to note that Roth IRA investments are not for personal use and must be held for investment purposes only. The funds used to purchase real estate must originate from a Roth IRA account but non-recourse financing opportunities are an option. Existing real estate assets cannot be transferred into the ROTH IRA account. Other broad categories of alternative investments include, but are not limited to: 

• Promissory Notes
• Private Equity
• Shares of a Business (Non S-Corp)
• Oil & Gas
• Precious Metals 

Prohibited Roth IRA Alternative Investments

With so many accepted Roth IRA investment alternatives you may be wondering what isn’t allowed? There are three such investment types:

• Collectibles. This category includes artwork, rugs, antiques, metals, gems, stamps, non-marketable coins, alcoholic beverages, and certain other tangible personal property. These types of investments are ruled out because valuations are often difficult to achieve on a regular basis and IRA rules demand regular account value reporting for tax purposes.
• Life Insurance. Because an IRA account is not a human being, it becomes difficult to own and administer life insurance and is therefore prohibited. 
• Shares of an S-corporation. S-corporations follow specific IRS taxation requirements and the tax-deferred nature of a traditional IRA or Roth IRA would go against those requirements. 

It is highly recommended that an investor keep on top of all applicable IRA rules when investing in alternative assets. One false step may result in IRS penalties which is why many self-directed Roth IRA owners rely on the guidance of their trusted custodian. 

How to receive an extra IRS tax credit for your retirement account

 There are numerous avenues for savvy spenders to explore when looking for a reduced tax burden. One such avenue is the Saver’s Credit, or the Retirement Savings Contribution Credit.

Available to 401(k)s and IRAs, the Saver’s Credit can be worth up to $2,000 for married couples who file a joint tax return. For single filers, the credit can be worth up to $1,000.

So how does it work? Who qualifies and how much will they get?

First, this tax credit is in addition to the tax benefits your retirement plan already receives. Think about it as an incentive to open a tax-free or tax-deferred account.

Eligibility for the credit depends on whether you’re single or married and how much money you make. Since the credit requirements change every year, let’s look at 2013’s numbers as a pretty good indicator for what 2014 requirements will be. You may be eligible if you are:

• Married filing separately or a single taxpayer with income up to $29,500
• Head of household with income up to $44,250
• Married filing jointly with income up to $59,000

Other rules apply for eligibility: you must be at least 18, you must have not been a full-time student the previous year and you can’t be claimed as a dependent on anyone else’s tax return.

Logically, another rule is that you must have contributed to a 401(k) by the end of the previous year in order to receive the credit, and to an IRA by the filing date of the current year (April 15).

To begin filing for the credit, access IRS Form 8880, which is the Credit for Qualified Retirement Savings Contributions. Tax software  (or a tax professional) will do this for you if you file your tax return online or with a tax service.

Keep in mind that the Saver’s Credit is just one benefit of retirement accounts. You can deduct money from certain accounts that you contribute to and the money you contribute to some accounts grows tax-deferred or tax-free. For more information on how to maximize your retirement account, call us at New Direction IRA or visit www.ndira.com.

Refer a friend to open a self-directed IRA account and save!

New Direction IRA, Inc. (NDIRA), an IRA administrative services provider, will give you a $50 credit if you refer a friend to open an account. The new account holder will get a $10 discount on the application fee.

NDIRA is a self-directed IRA provider that lets investors take control of their retirement funds. With an NDIRA account, you can invest your IRA in real estate, precious metals, private equity and more alternative assets.

Most IRA providers will choose your investments for you, or will require you to pick investments that the company has pre-determined. Typically, these investments are limited to publicly traded securities like stocks, bonds and mutual funds. However, an SDIRA puts the power back in your hands by enabling you to invest in what you know and trust.

NDIRA clients keep coming back and referring their friends and family because they are the best in the industry. We have unique technology that makes everything from buying property to collecting rent to exchanging gold assets for silver assets a breeze.

In the last year, NDIRA grew its client base more than 15 percent. That increase is largely because of the NDIRA’s innovation. By listening to investors, financial advisors and industry professionals, NDIRA has developed a service model of great technology and exceptional customer service that meets the unique needs of every partner.

Call us at NDIRA today to get started with alternative asset investing with self-directed IRAs. Whether your goal is to have a real estate IRA, gold IRA, health savings account (HSA) or anything in between, NDIRA can help.

What is a Roth IRA?

Roth IRAs--passed into law in 1997--are a very popular way to save for retirement because investment earnings are tax-free.

With a Roth IRA, cash is contributed "post-tax" which means that the contribution (the amount you delegate out of your salary to put into the account each year) is made with taxable earnings for that year. This cash then buys assets (stocks, real estate, gold, etc.) on a tax advantaged basis. In other words, assets can be bought, sold, or traded within the IRA without incurring capital gains tax and without affecting the IRA holder's personal taxes.

Roth IRA holders may also withdraw the amount they contributed at any time without penalty or tax liability. When you reach 59.5 years of age, you can begin to withdraw from the account (take a distribution) without penalty and without taxes as long as the account has been open for five years. Unlike a Traditional IRA, with a Roth IRA, contributions may be made even after you are 70½, and you are not required to take distributions at any age.

You are allowed to convert any amount of funds from a Traditional IRA to a Roth IRA but it will be taxed. The amount converted in a given tax year is added to your ordinary income for that year.


Given the unique tax benefits, Roth IRAs are a powerful tool to save for retirement to begin with. But you can maximize your Roth IRA further by self-directing your IRA and investing in alternative assets like real estate, precious metals, private equity and more.

Self directed IRAs are becoming popular in their own right and allow you to invest in assets you know and trust. For more information on Roth IRAs or self-directed IRAs, visit www.newdirectionira.com.

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IRA Plan Types Explained!

Saving for retirement is crucial and the IRS has provided several tools to help you do so.

The most common plan type is the Individual Retirement Arrangement or IRA. An IRA is like a bank account that you contribute to but can’t withdraw from until you are 59.5 years of age. As a bonus, the IRS has given IRAs special tax treatment to allow them to grow faster.

There are two types of IRAs: Traditional IRAs and Roth IRAs. With a Traditional IRA, contributions (deposits) are made with pre-tax funds and are normally removed directly from your paycheck. This type of plan is called a tax-deferred plan because taxes are paid when the funds are distributed (withdrawn) at retirement. On the other hand, Roth IRA contributions are made with post-tax funds and since tax has already been paid there is no tax on distributions at retirement.

Complementary to the above Traditional IRA, the IRS offers two employer plans: the SEP IRA and the SIMPLE IRA. These plans increase employee’s contribution limits and allow the employer to contribute to their IRA as well. The SEP IRA is normally found in small companies and lets employees defer an additional $4,000 and allows the employer to contribute up to 25% of the employees salary to the plan. With a SIMPLE IRA, the employee can contribute an additional $10,000 a year and the employer contributes 3% of the employees’ compensation (or matches their contribution, whichever is less.) SIMPLE IRAs are often implemented in small to medium size companies because they are much more affordable than a 401(k) plan.

401(k)s, unlike SEPs and SIMPLEs, have no relation to Traditional IRAs other than that funds from a past employer’s 401(k) plan can be rolled-over into a Traditional IRA. Due to their relatively high cost, 401(k) plans are normally found in large companies however the plan is much more flexible than the other plans.

Unknown to most people, the IRS allows a broader rage of investments than securities. In fact, the IRS code only prohibits two investments: life-insurance and collectibles. This means that real estate, notes, LLCs, private stock, gold bullion, (and much more) are all possible investments in any of the above plans. Although these are all allowed, most administrators don’t offer them because each investment is unique and there is a high time involvement working with the client. To invest in these types of non-traditional investments, you need to move your plan to a self-directed administrator that specializes in this field of investing.

For more information on self-directed plans and non-traditional investments, contact New Direction IRA at 303-546-7930 or visit us at www.NewDirectionIRA.com