1. Discount Valuation
in
IRA to Roth
Conversions
This power point is for professional purposes
and is not to be distributed to the public.

2. Problem: Most Funds Are
Held in Highly Taxable IRAs
Goal: Have all funds held in the Roth IRA
environment.

3. Problem: Conversions Are
Taxed at Participant’s
Marginal Tax Bracket.
Goal: Reduce taxes on conversion to an
acceptable level.*
*Cannot be zero.

4. A Typical Scenario
Traditional IRA
Roth_____
Greatest Amount of Assets Fewest Assets
Example:
$500,000 $0

5. Traditional IRA
Roth_____
Convert?
$500,000 $0
Obviously, the only option is
to convert, but ….
Converting $500 K all at
once incurs HUGE Taxes.

6. Traditional IRA
Roth_____
Convert?
$500,000 $328,878
A person earning $75,000 If that person paid all the
per year, converting tax out of his conversion,
$500,000 would pay he would lose 34% of his
$171,122 in taxes. retirement in taxes.

7. Traditional IRA
Roth_____
Consecutive
Conversions
$500,000 $0
To stay in the 25% tax
bracket, this person would
convert an amount that
would take him to the
maximum limit of the
bracket each year, without
going over.

8. Traditional IRA
Roth_____
Consecutive
Conversions
$500,000
$0
Maximum Limit for Tax Bracket*
- Current Income
=
Amount to Convert
*Maximum earnings for the 25%
bracket, married – filing jointly, for
2011.

9. Traditional IRA
Roth_____
Consecutive
Conversions
$500,000
$0
$139,350* - $75,000 =
$64,350
A Person Earning $75,000
could convert $64,350
each year until his IRA is
completely converted.
*Maximum earnings for the 25%
bracket, married – filing jointly, for
2011.

10. A Typical Scenario
Traditional IRA
Roth_____
$500,000
Amount Converted TAXES Converted to Roth
$64,350 - $16,088 $48,262
To convert the entire IRA
in this manner takes 8
years, not counting
earnings or market
fluctuations.

11. A Typical Scenario
Traditional IRA
Roth_____
$500,000
Amount Converted TAXES Converted to Roth
$64,350 - $16,088 After 8 years of
$64,350 - $16,088 Serial Conversions,
$64,350 - $16,088 the Roth would have
$64,350 - $16,088
$64,350 - $16,088
$64,350 - $16,088 $374,996
$64,350 - $16,088
$49,550 - $12,388

12. Account Values after Conversion
Total Conversion vs. Consecutive Conversion
$328,878 $374,996
Performing a serial conversion over 8 years saved a total of
$46,118

13. REAL ESTATE
The ONLY Asset Class that can help you.

14. Real Estate Conversion
Traditional IRA
Roth_____
Step 1. Your IRA or 401K buys
a rental property.
$0
A 3 bedroom, 2 bath residential
House, appraised at $200,000.
Monthly rents of $1,500.

15. Real Estate Conversion
Traditional IRA
Roth_____
Step 2. Obtain a Non-Recourse
Loan on the property.
$0
Non-Recourse loan - 60% LTV,
25 year amortization, 5 year
balloon, 5.5% interest.

16. Real Estate Conversion
Traditional IRA
Roth_____
Step 3. Deed half the house to the
Roth.
$0
Either a quit claim deed or
warranty deed will do.

17. Real Estate Conversion
Traditional IRA
Roth_____
Step 3. Deed half the house to the
Roth.
$0
Joint ownership creates
an undivided interest
between the Traditional
and the Roth IRAs.

18. Real Estate Conversion
Traditional IRA
Roth_____
Half the Value Is Retained by the IRA
and Half is Transferred to the Roth
$200,000
$100,000 $0

19. Real Estate Conversion
Traditional IRA
Roth_____
Now that half is owned by each
account, you may ask …..
$100,000 $100,000
“What’s the benefit of this?”

20. THE IRS
In 1917, the IRS ruled that
“A transfer tax appraiser should make a
deduction in valuing an undivided
fractional interest . . . “

21. THE IRS
In 1917, the IRS ruled that
“A transfer tax appraiser should make a
deduction in valuing an undivided
fractional interest . . . “
In 1917, the IRS allowed a 15% discount.

22. THE IRS
In 1917, the IRS ruled that
“A transfer tax appraiser should make a
deduction in valuing an undivided
fractional interest . . . “
In 2005, the IRS allowed a 60% discount.

23. THE IRS
A residential property would rarely qualify for
a 60% discount, however one can readily
obtain discounts of
33%

24. Real Estate Conversion
Traditional IRA
Roth_____
What does that mean for the transfer?
$100,000 $100,000
- $33,000
$67,000
Because the Roth’s portion of the
house is marketable only if the IRA
agrees to sell its portion, it suffers
discount valuation.

25. Real Estate Conversion
Traditional IRA
Roth_____
What does that mean for the transfer?
$100,000 $67,000
The taxable value of the
conversion, at this point,
is $67,000.

26. Real Estate Conversion
Traditional IRA
Roth_____
Move the Debt
$100,000 $67,000
There is a Mortgage of
$120,000 on this house.
When half the house is
moved, half the debt is
moved also.

27. Real Estate Conversion
Traditional IRA
Roth_____
Half the Value and Half the Mortgage The Half Converted to the Roth Suffers
Are Retained by the IRA Discount Valuation
$200,000
$100,000 $0
$67,000
$120,000
$60,000
$60,000
*NOTE: The Debt Does Not Discount

28. Real Estate Conversion
Traditional IRA
Roth_____
The Roth Now Owns a Half Worth
$67,000 ….
$100,000 $0
$67,000
- $60,000
Encumbered by $60,000 Worth of
Debt.
$60,000

29. Real Estate Conversion
Traditional IRA
Roth_____
The Net Value of This Property Is
$100,000 $0
$67,000
- $60,000
$7,000
$60,000

30. Real Estate Conversion
Traditional IRA
Roth_____
The Net Value of This Property Is
$7,000
$100,000
In a 25% Tax Bracket
the Tax Due Is
$1,750
$60,000

31. Real Estate Conversion
Traditional IRA
Roth_____
One Further Advantage to . . . … a Real Estate Conversion
Rents Are Split with Roth Income
$1,500.00

32. Real Estate Conversion
Traditional IRA
Roth_____
Step 4. Distribute the Second The Next Year, When the House Is
Half of the House to the Roth. Fully Distributed ….
The Value Has Already Been
Established, Thus Another
$1,750 In Taxes Is Due.

33. Real Estate Conversion
Traditional IRA
Roth_____
A $200,000 House Has Been
Converted from an IRA to a Roth…
and Only $3,500 Has Been Paid in
Taxes.

34. Real Estate Conversion
There is a little more to it than that, but that’s how it
works in its simplest form.
The Conversion Offers Important Advantages:
1. Great reduction in tax paid on conversion.
2. Immediate generation of tax free income.
3. All growth and income become tax free.
4. NO Required Minimum Distributions (RMD)
in a Roth IRA. You maintain control forever.