A Roth conversion allows you to move funds from a traditional IRA or your Solo 401k (or SEP), where contributions are often tax-deferred, into a Roth IRA/401k, where earnings grow tax-free, and qualified withdrawals remain tax-free. 

During a conversion, the amount transferred becomes taxable income in the year of conversion. 

However, the tax-free growth and withdrawal advantages make Roth IRAs an attractive choice, especially if you expect your income tax rate to increase in retirement or if you want to minimize required minimum distributions (RMDs).  None of us k now what the tax rates will be in retirement.  However, if you watch our Power of 0 Webinar, many economists predict rates will have to rise over the next 50 years to service the interest on our debt. 

Investing in an active oil and gas fund can generate significant tax deductions, potentially offsetting the income generated by the Roth conversion. In this scenario, we measure the investment vs the conversion to create a 100% tax free scenario. 

Here’s how:

1. Immediate Deductibility of Intangible Drilling Costs (IDCs): Oil and gas investments often allow investors to deduct IDCs, which are typically around 70-85% of the investment amount in the first year. This deduction can directly offset the income from your Roth conversion.  Check out our Anomaly Oil & Gas webinar to learn more OR reach out to your PM to learn more.
   
   
2. Tax Treatment of the Deductions: As IDCs are considered an “active loss,” they can offset other forms of active income, including the income created by the Roth conversion. For example, if your Roth conversion adds $50,000 to your taxable income, an oil and gas investment might yield an IDC deduction of $50,000, effectively offsetting the Roth conversion 100%.

If you own a short-term rental property and use our STR Loophole, you can use accelerated depreciation to 100% offset the Roth conversion income.
Here’s how:

1. Qualifying as Active Participation: To generate active losses, you must meet IRS criteria for “active participation,” which requires that you materially participate in the rental activity. In short-term rentals (typically defined as rental periods averaging seven days or less), your participation can yield active losses, which can offset other forms of income, including Roth conversions.
   
   
2. Generating Real Estate Losses: Real estate losses can arise from various expenses, including depreciation, maintenance, property taxes, and mortgage interest. For example, a short-term rental property may yield $30,000 in deductible expenses in a given year. If you complete a Roth conversion of $30,000, these deductions can offset the income added by the conversion.
   
   
3. Benefits Beyond the Roth Conversion: Besides offsetting the Roth conversion, active losses from short-term rentals can potentially offset other types of income, providing added tax benefits.
   
   
4. Considerations and Risks: Actively managing a short-term rental can be time-intensive, and the IRS has strict rules to qualify losses as “active.” Misclassification could lead to penalties and additional taxes.

1. Tax-Free Growth: Using our previous example, now that $50,000 is in a Roth IRA/401k, it will grow tax-free. Assuming an average return of 7% per year, this $50,000 could grow substantially over 20 years:
   
   
2. After 20 years, the Roth IRA would grow to approximately $193,484, all of which would be tax-free upon qualified withdrawal.  Compare this to keeping in a pre-tax account where the money would then subject to tax at tomorrow's tax rates. 
   
   
3. No Required Minimum Distributions (RMDs)!  This is probably the biggest benefit.  Unlike traditional IRAs/401ks, Roths are not subject to RMDs during the original owner’s lifetime.  You control your destiny and will not be forced to take money out by the government.

If you are eager to get more money into a tax free ROTH account, consider our ROTH conversion strategies to get the best of both worlds.

1) You received a tax deduction on the way in
2) You are converting money to a 100% tax free account and paying NO tax with our strategies.

Ready to execute or learn more? Reach out to your PM to get started!