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Tax Efficient Retirement Assets

Minimizing tax liabilities on your hard earned retirement accounts

Misguided Advice?

Advocates of 401(k), 403(b) and other defined contribution plans have convinced us that we should defer paying tax on retirement contributions until later years.

We are encouraged to fund taxable retirement accounts early and often as we enter the workforce, but could that advice be misguided?

For the average person, the first few decades of one's career are potentially some of the lowest income tax brackets they will experience.

Mounting Tax Liabilities

It is easy to overestimate the amount of retirement savings by underestimating its tax liabilities.

Growing a retirement nest egg is a positive aspiration, but avoiding a lower income tax payment to only defer and pay substantially higher rates in retirement is not.

For those that plan well, retirement accounts can be tax efficient, without required minimum distributions and structured to leave beneficiaries tax free assets.

ROTH IRA Benefits and Limitations


A Roth IRA is a type of tax-advantaged individual retirement account to which one can contribute after-tax dollars toward retirement.  The primary benefit of a Roth IRA is that contributions and earnings on those contributions can grow tax-free and be withdrawn tax-free after age 59½, assuming the account has been open for at least five years.  Taxes are paid on money going into the Roth IRA, and then all future withdrawals are tax-free.


Roth IRAs are like traditional IRAs but differ on how the two are taxed.  ROTH IRAs are funded with after-tax dollars.  Unlike a traditional IRA, the contributions are not tax-deductible, but once you start withdrawing funds, the money taken out is tax-free.


With a ROTH IRA, the earlier you start the better, as account growth compounds tax free.  Additionally, there are no required minimum distributions and ultimately assets can be passed to beneficiaries' tax free.

Children Kayaking on River

ROTH Limitations

The IRS and federal government are keenly aware of the substantial loss in tax revenues from those that invest in ROTH IRA accounts.  As such, they limit the ability to contribute to those with earned income below certain thresholds.


For 2024 the phase out started at $146,000 for individuals and $230,000 for those married filing jointly.

Discounted Tax Conversion Strategies

Couple on Cruise Ship

Back Door ROTH IRA

Working within the confines of these limitations, investors can consolidate assets in an IRA account through direct contributions or rollovers from defined contribution plans such as 401(k)s and 403(b)s.  Once consolidated under the IRA, assets can be converted to a ROTH IRA through a direct rollover.  This is often referred to as a back door ROTH as it is an acceptable strategy to navigate the limitations of regular ROTH IRAs without income thresholds of direct contributions.  This also provides the ability to aggregate lump sum assets within a ROTH account.

Discounted Conversion Strategies

One deterrent for consolidating assets in a ROTH IRA is the up-front cost.  Assets removed from an IRA are taxed as ordinary income the year of conversion and may elevate tax brackets.

Discounted conversion strategies allow the purchase of investments inside an IRA to have their valuations be marked down based on widely accepted practices such as reflecting illiquidity, lack of marketability, ownership of non-controlling interests and real estate expenses related to the “J Curve”.  A discounted value at the time of conversion means taxes paid are reduced to reflect the share repricing.

Hypothetical Illustration

The following illustration is for hypothetical purposes only and does not represent an actual program or offering for investment.  The key to this ROTH conversion strategy is the ability to mark down an offering share price based on certain factors specific to that investment.  These may include certain accounting principals for assessing valuation such as shares being illiquid, lack of marketability, or ownership of non-controlling interests.  In addition, there is what is referred to as the “J Curve” for real estate development where costs of building new properties and structure renovations reduce share valuations during the construction phase.

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The flow chart below illustrates a potential discount when converting IRA assets to a ROTH IRA.  The shares of the offering are purchased inside a self-directed IRA.  During a designated period, shares are independently appraised to reflect a potential reduction of value from items discussed above.  After markdown, the IRA is converted to a ROTH IRA.  In this example, the markdown of shares from $10.00 to $6.00 allows the owner to pay tax on $80,000 less of conversion income with a tax savings of $31,600.  This equates to a 16% return on their $200,000 original investment.  It is anticipated the programs will compound the return from tax savings with potential cash flow, capital disbursements and/or a liquidity event from a sale of assets.

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