IRA to Roth IRA Conversion Strategy - Is this a sound strategy ?

[Art Webb]

Hello, I ran across a conversion strategy where an annuity company would add a significant cash bonus to my IRA conversion account to cover the conversion taxes so my conversion is tax free to me (well some what). The annuity company is Athene which I understand is a top ranked annuity company. This would be a ten year initial commitment of my IRA converted Roth IRA dollars. They promise my growing Roth IRA account balance becomes a floor and protects my account balance from being negatively impacted by market changes. I'm allowed to withdraw 10% per year up to the ten years. Commission paid is .095% of account balance for each of the ten years. Appears best way for me to reduce my commission costs is to reduce my Roth balance by 10% each year. I could roll over those amounts into another Roth IRA of my choosing. Beneficiary would receive current balance at time of death IAW Roth IRA rules.

All sounds good but I’m not familiar with Athene’s possibly non stock investment vehicles.  My monies would be invested in a group of six indexes named AIGO, AIPEX, BNPIMAD5, BOFANFCC, SPXFCDUE, and UBSIBAL.  I would appreciate anyone’s comments on this type strategy good or bad and your opinion of these indexes.   Thanks so much !

[Pat Aboukhaled]

Hey Art,

Your Athene strategy definitely piqued my interest. A few months back, a longtime client of mine was enticed by a similar annuity offer promising to cover conversion taxes with a cash bonus. On the surface, it seemed like a fantastic deal. But as we sat down over coffee and sifted through the details, a few things didn't sit right.

Those indexes... AIGO, AIPEX, BNPIMAD5, and the rest... they're not exactly the kind you hear about every day. He found it challenging to get comprehensive info on their historical performance and the underlying assets. Plus, commiting his funds for ten years felt like a significant leap, especially since he was eyeing some promising real estate opportunities.

We ended up exploring investment properties in Phoenix. Jim invested in a small apartment complex, and within two years, not only did the property's value appreciate significantly, but the rental income also provided a steady cash flow.

Real estate offers a level of control and tangible value that can be really rewarding. You can influence your investment's performance through property improvements, rent adjustments, and savvy management... something you can't quite do with an annuity tied to obscure indexes.

An Individual Retirement Account (IRA), particularly a Self-Directed IRA, can be used to invest in real estate and employ leverage to potentially enhance returns. By purchasing property within the IRA, you can use non-recourse loans-where the property itself is the only collateral-to finance a portion of the investment. This means the IRA can own a leveraged real estate asset, and any income or gains from the property grow tax-deferred (or tax-free in a Roth IRA). However, it's important to note that using leverage in an IRA can trigger Unrelated Business Income Tax (UBIT), and there are strict IRS rules to follow to avoid prohibited transactions. Consulting with a financial advisor or tax professional can help navigate these complexities.

It might be worth considering how real estate investments could align with your retirement goals, especially in thriving markets like Phoenix or Austin.

Just my two cents based on experiences with clients like Jim. If you'd like to toss around some ideas, I'm here.

- Jasper / Pat Aboukhaled
Turning investment visions into reality in Phoenix, AZ - Ranked #1 for residential real estate growth and opportunity by PwC

[Art Webb]

Thank you Pat. So did Jim convert and pay the conversion taxes for a Roth or a direct real estate investment with his IRA ? Understand all above. I have bought commercial RE in a Roth SDIRA and separately purchased a couple investment properties via 1031 exchanges outside of my IRAs.

I too have hesitation of the above index funds and need to investigate further.  Hopefully others may have some experience with them or similar.  Thanks again !  Art