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Inherited IRA Options, Real Estate and more | Client Q&A

AdMail Podcast

In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about Inherited IRA options, making a real estate investment with family members and if a Roth conversion makes sense.




Question 1 from Tiffany J in Santa Barbara, CA: If I inherit an IRA, do I have to take it or can I disclaim it?

If you are the beneficiary of an IRA, you do have the option to disclaim it. There are some reasons why you may not want to accept the inherited IRA, no matter if you’re the spouse or a non-spousal beneficiary of the plan. If you’re the decedent’s spouse and your children are listed as a secondary beneficiary, you may want to pass on inheriting it yourself and instead, let your child(ren) benefit from the IRA. If the will says something different, the beneficiary form actually supersedes the will. The will might have been updated depending on circumstances and the beneficiary form may not have been. It’s an important reminder to make sure your beneficiary changes are made not only in your will, but your beneficiary form as well.

For whatever reason, if you decide to disclaim the IRA, you must make it known to the IRS within nine months of the original IRA owner’s passing. The next in line, whether a second primary beneficiary or contingent beneficiaries, would receive the benefits of the IRA.

Question 2 from Roger A in Odessa, TX: Can I invest in a real estate investment with myself, my sister, and my dad, who will own just 22%?

This is a “facts and circumstances” type of question, so there is no exact answer. It’s going to be up to an IRS agent to determine who benefits from the investment. However, Mr. Bergman breaks it down as best he can. First, there is no problem when a sibling is involved in an IRA investment. Brothers and sisters are not considered disqualified persons. However, you, the IRA owner, and your father, a lineal ascendant, are considered disqualified persons. Remember, any investment made by the IRA must only benefit the IRA itself and not a disqualified person.

A lot depends on how much of the investment is owned by the IRA. If, combined with your dad’s stake, the IRA owns more than 50%, there may be an issue. If the aggregate investment is under 50%, that’s a plus. Further, if the IRA investment is being made to help your father, it will probably be considered a prohibited transaction. Again, the facts of the investment will ultimately decide of the investment can be made as laid out in the question.

Question 3 from John J in Phoenix, AZ: I am 57 years old, own an apartment building in my IRA that has appreciated significantly in the last three years. Should I do a Roth Conversion?

A Roth IRA conversion is the process of converting funds from a traditional (pretax) IRA to a Roth (after-tax) IRA. Any amount converted will be treated as taxable income for the year it is done. However, all qualified distributions, including any income and gains, are tax-free during retirement. When does it make sense to do a conversion?

The first thing you need to consider is the value of the investment. Many assets have decreased in value this year due to the COVID-10 pandemic. Thus, it makes a lot of sense to convert assets that have decreased, assuming you think those assets will increase in value in the near future. The advantage is that you pay taxes on the lower value, and receive tax-free gains when it drives back up.

However, John’s apartment building has actually appreciated in value, so it’s not a black and white answer. There are a few factors to consider. First, what is your tax situation? If you are in a high tax bracket, it might not be worth paying more in taxes on a conversion. What will your tax situation be once you have to begin taking required distributions at age 72? Next, do you have the funds on hand to pay the taxes on the conversion? It doesn’t make sense to use IRA funds to pay those taxes. It beats the purpose of the conversion. Lastly, what is the forecast of the investment? Will it continue to appreciate? If not, why pay taxes on a conversion if the asset will not continue to rise in value! Like many tax questions, it comes down to the individual and the asset. Therefore, there is no one right answer for converting an IRA.

AdMail – Keep it Coming

We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].

As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!

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