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Save On Roth Conversion Taxes By Investing In Energy

Save On Roth Conversion Taxes By Investing In Energy

May 13, 2020

Roth IRAs are an excellent investment vehicle because there are no taxes due on any of the growth. You can put money into a Roth IRA and let it grow for decades without owing an additional cent in taxes. The downside to Roth IRAs is that there are income limitations to be able to invest directly into one, and many high-income earners are not eligible.

The only way for high-income earners to invest in a Roth IRA is through a Roth conversion, where you pay taxes in order to convert your account from a traditional to a Roth. The entire account balance being converted is taxable as regular income, which can greatly increase your tax liability. One good way to limit the taxes on a Roth conversion is by investing in an LLC with U.S. Energy.

Step 1: Open An Account

The first step is to open a new account or fund an existing account with one of U.S. Energy’s pre-approved clearinghouses. Right now, you can contribute up to $6,000 ($7,000 if over age 50) for the 2019 tax year and the same for the 2020 tax year to an IRA account. You can also roll a 401(k) or other employer-sponsored account into an IRA after you have left the employer. These IRA investments in U.S. Energy are made within an LLC business structure so that distributions are not subject to Unrelated Business Taxable Income. 

Step 2: Convert The Account

When you first fund the account, it will show as being worth the amount of money you put into it. However, in the second year, the LLC will have to undergo an independent valuation so that the book value can be updated with the account custodian. These investments usually decrease substantially in book value during the first year. Historically, they have only been 9-17% of the original investment. For example, if your initial investment is $100,000, by the second year it may only be valued at $15,000 on paper.

Now is the time to convert the account to a Roth, when it shows a very low book value. In doing so, you will only have to pay income taxes on the lower book value amount and not the original investment amount. That would save $29,750 in taxes for someone in the 35% tax bracket with the above-mentioned investment. It is important to remember that this lower book value is not a reflection of potential distributions investors may receive or how the unit would be valued if presented for sale.

Step 3: Enjoy Tax-Free Growth

Now that your investment is in a Roth account, all future withdrawals are no longer taxable income. Any distributions received in the future will be able to be invested and grow tax-free. Not only does a Roth account enable tax-free growth, but it also allows for more flexibility when strategizing to minimize taxes in retirement since it provides a tax-free source of income.

How I Can Help

As you can see, investing in an LLC with U.S. Energy allows you to convert a traditional IRA account to a Roth at a steep discount. This can be a great benefit as you look to build and diversify your retirement portfolio and limit your tax liability. If you have questions about using energy investments for discounted Roth conversions or strategically building your retirement portfolio, our team at Grace Wealth Management Group can help. Call me at (949) 631-3840 x2, email for a free consultation, or schedule an appointment here.

About Jim Peters

Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim on LinkedIn or visit