Roth Roll Over

[Guest valerie4975]

Hi

First off - I am looking for a CPA who understands IRA law and real estate investing within an IRA. I live in New York so I thought it would be easy but I am coming up short. Are there any good directories for CPA's ?

I currently have a large sum in an IRA account that I am considering rolling over into a roth. My tax rate in 2004 was very low but am expecting to make more (self employed) income this year. I have an opportunity to invest in real estate with an expected return of 30%-40% and thought the roll over would be a good idea. I am currently 40 so have at least 20 years to invest. Are there any reliable ways to calculate whether or not this is a good idea?

In addition if I pay the taxes out of the IRA do I pay a 10% early distribution penalty and the pay taxes on that amount? ie. Rollover $100,000 tax rate %15 - taxes owed $15,000. If paid from IRA taxes would be 15% of $115,000 and I would incur a penalty of $1500. So toatl payments out of the IRA would be $18,750.

At the risk of asking too many questions in one post - am I correct in the knowledge that the rollover does not count as part of my AGI?

Thanks

VAl

[John G]

You may be going down a very bad path. I saw nothing in your post that suggested that getting into real estate investing makes sense. The RE market is extremely frothy in about a dozen areas, including the NYC area. When folks are buying an flipping homes completely on spec, you should be very concerned that the greater fool theory may apply. I think it is very likely that interest rates will click higher two more times this year and those kinds of increases will eventually reduce the pool of potential buyers and perhaps change the amount of money buyers are willing to spend.

But enough about real estate theory. There are other problems with your post:

1. You can't do a 2004 conversion anymore. Time expired the end of December.

2. I don't know what a good number for set up costs should be, but if you are concerned about $4k then you should not even be thinking about this.

3. One of the benefits of real estate investing is the tax writeoffs. Buying real estate related to a tax shelter completely changes things. You also give up the long term capital gains option and I suspect to render ineffective the real estate swap.

4. You do not want to pay the taxes for a Roth conversion by drawing funds out prematurely from the IRA. This severely degrades the conversion math.

5. Number 4 suggests that you do not have significant resources outside of your Roth. Where are your reserves? You normally can draw down from a Roth - using it as your reserve. But.... real estate assets are illiquid.

6. There are many dangers to any kind of complicated Roth. If you make any kind of mistake, you may suffer mightily. The extreme negative result is the loss of your Roth tax exempt status and being hit for Taxes and penalties.

So my question to you is: "Why real estate?" Do you feel you have some kind of edge in real estate? If you just like the concept of real estate investing, there are funds, REITS and LLCs open to you. I have been expanding in this direction for the past two years... but would never do real estate deals in my Roth or IRA.

[Guest valerie4975]

I am a real estate investor. I was not asking for investing advice. I am looking for competant CPA/IRA advisor and was hoping someone here could give me a source. I guess not.

As to your replies

1. I know I cannot do a conversion for 2004. I only mentioned 2004 to give an idea of my current earnings.

2. I am not concerned with spending $4,000 if it is the right price. I know the cost of setting up a regular LLC - it is nowhere near $4,000.

3. I am aware of these things.

4. Your answer here was helpful - thank you

5. I am not quite sure what you mean by reserves.

6. That is why I came here - to try and find a competant advisor.

Obviously, I have come to the wrong place for advice in this area.

Sorry to have take up you time - I will continue my search.

[John G]

It would have helped if you could have given a little background about yourself before asking the original questions. There is a big difference between the average person wanting to do real estate investing with an IRA and a professional involved in real estate. Your first post asked a lot of questions and provided very little background information. You made comments about a 2004 conversion and paying taxes our of your IRA which suggested that you had not read back posts at this site and was familiar with Roth conversion rules and math. Perhaps I got off on the wrong track trying to respond.

Your follow-up posts said:

2. I am not concerned with spending $4,000 if it is the right price. I know the cost of setting up a regular LLC - it is nowhere near $4,000.

REPLY - the last three real estate LLCs that came across my desk cost more than 10x the $4k to set up. Perhaps you are only talking about simple LLC involving just yourself - your post is not clear on that point. An LLC, private corp. or sub S can have a low out of pocket cost... under $100 in some states if you pursue the do-it-yourself approach. Jump that to $1000 using a lawyer/CPA and perhaps more in NYC.

BUT, your proposal involves real estate and IRAs, which raises the complexity. Some professionals will not want this work because of the potential liability exposure of making a mistake - a cost associated with doing relatively rare transaction. Do not be surprised if the professionals you chose to hire are unwilling to give you a flat rate. I would want a time and expenses arrangement when there is uncertainty and perhaps iterations.

There are plenty of ways to find a CPA... the internet, yellow pages, etc. If you are an active real estate professional, why are you bringing this question to this message board? Start with your accountant, lawyer, tax professional, and real estate contacts. Your local networking will narrow the field.

5. I am not quite sure what you mean by reserves.

As Mbozek mentioned in a different post, how do you plan to solve the problem of a "cash call". If you buy real estate in a LLC and a downdraft in the economy causes you to go upside down, how do you solve a potential "cash call" problem? The actions you might want to take could violate the tax structure you have built.

Sometimes folks who post on this message board have completely committed all of their assets leaving no available cash reserves. Your comment about paying the taxes with IRA assets suggested that you have no outside cash reserves, but your posts did not mention outside resources. Because you are planning to invest in real estate, your IRA/Roth is less liquid and can not readily serve as a cash reserve. Also note, there are prohibitions on pledging IRA/Roth assets for a loan.

The CPAs and tax professionals who respond to questions may be able to help you if you post more details about your specific circumstances. No one can answer a generic question like this "Are there any reliable ways to calculate whether or not this is a good idea?" Try posting a tighter question with enough background information.