Four Reasons to Convert to a Self-Directed Roth IRA


by Dennis Blitz

ome Investment Advisors tell their clients to not use a Roth

doubt, if a person expects to keep earning money (from investments), a Roth IRA is the greatest opportunity Congress could have ever handed them. Advantages of converting from a Tradi- tional IRA to a Roth IRA Or Advantages of converting a Retirement Plan from a former employer to a Roth IRA NO. 1 Pay tax on the seed, not the tree. If you believe the investments your IRA will be making have growth potential, your choice is clear. You can pay the tax now before the value grows or wait until the investment appreciates to pay a tax bill based on a higher valuation. (It’s a no brainer). NO. 2 Whichway are taxes headed in the future? If you perform a Roth IRA Conver - sion now, you will pay the current income tax rates for your conversion. If you keep your Traditional IRA, you will be taxed at the income tax rates as they will be in the future. Which way to you believe income tax rates will go? In the future, do you believe tax rates be lower than they are today or higher? Converting locks in today’s rate. Some economists believe income tax rate risk is great - er than investment risk.


NO. 3 Tax-free distributions as early as one day after a Roth Con- version. Many people believe that money in an IRA is locked up. Not true, there is no “lock-up.” Here is an example. Sam (age 48) sees a good invest - ment opportunity. He wants to use his IRA to make the investment. Because the profits could be good, Sam decided to convert his $80,000 Traditional IRA to a Self-Directed Roth IRA account so he can avoid the bigger tax bill in the future. Sam’s Roth IRA makes the investment. Nine months later the IRA cashes out of the investment for $175,000. However, a family need comes up and Sam could use $50,000. But his money is tied up in the IRA. Sam calls our office, and says he wants to take a distribution of $50,000. He knows because he is not yet 59 ½, he’ll get clobbered with taxes. We send Sam the $50,000 he requested. How much income tax will Sam pay on the $50,000? Zero. Because of FIFO accounting, the distribu - tion we send to Sam was from the $80,000 he originally converted to the Roth (not from the profits made by the IRA). (The amount of a Roth IRA conversion may be distributed to the account owner any time with no

IRA but a Traditional IRA instead. Their logic is with a Traditional IRA, the client gets a deduction for the amount of their contribution in the current year. Of course, in the future, the distributions from that IRA account will be taxable. Their theory is, when it is time for the dis- tributions you will be in a lower tax bracket. I agree, in some cases, this could be true. However, is the invest - ment advisor really saying to their client, “Stick with me and someday you will be in the lowest income tax bracket?” The reality is that investors never stop making investments. Just when other people are retiring and watch - ing their income drop to nothing, investors are entering their largest earning days and their earning pow- er will keep snowballing. In other words, investors never achieve the goal on zero income. Instead, they can easily find themselves spending the last 30 or 40 years of their life not in the lowest but in the highest tax bracket. By using a Roth IRA, the investor does not just move them - selves to a lower tax bracket in the future, they move themselves into a 0% tax bracket (on the earnings made in their Roth IRA). There is no

60 | think realty magazine :: february 2021

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