REIPRIME Logo
Intermediate1 hour34 terms

Backdoor Roth IRA Key Terms

Explore key terms that might be helpful when navigating the Backdoor Roth IRA strategy. This curated collection provides definitions for commonly referenced concepts, supporting your understanding of this advanced retirement planning technique. Use it as a quick reference to clarify terminology you may encounter.

Term Collection

1

Taxable Conversion

A taxable conversion in real estate occurs when a property's use or status changes in a way that triggers an immediate tax liability, often due to a recharacterization of gains or depreciation.

Intermediate6-7 min
2

Ordinary Income

Ordinary income refers to any type of income that is taxed at regular income tax rates, as opposed to preferential rates like those for long-term capital gains. In real estate, this commonly includes rental income, active business profits, and interest income.

Intermediate5 min
3

Contribution Limits

Contribution limits are the maximum amounts of money individuals can contribute to various tax-advantaged investment accounts, such as IRAs and 401(k)s, as set by the IRS annually. These limits are designed to regulate tax benefits and ensure equitable access to investment incentives.

Intermediate4-6 min
4

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, leading to a decrease in the purchasing power of currency over time.

Intermediate14-15 min
5

After-Tax Contributions

After-tax contributions are funds added to a retirement account, such as a 401(k) or IRA, that have already been taxed, offering a pathway for tax-free growth and withdrawals in retirement.

Intermediate3 min
6

401(k) Plan

A 401(k) plan is an employer-sponsored retirement savings account that allows employees to contribute a portion of their salary on a tax-advantaged basis, often with employer matching contributions, to invest for their future.

Beginner5 min
7

Tax Exemption

A tax exemption is a statutory reduction or elimination of an obligation to pay a tax, often granted to specific individuals, organizations, or property types to reduce their property tax burden.

Intermediate6 min
8

Adjusted Gross Income

Adjusted Gross Income (AGI) is an individual's gross income minus specific deductions, often referred to as "above-the-line" deductions. It serves as a foundational figure for calculating tax liability and determining eligibility for various tax credits and deductions.

Intermediate5-6 min
9

IRS Compliance for Real Estate Investors

IRS Compliance for real estate investors involves adhering to all tax laws, regulations, and reporting requirements set by the Internal Revenue Service to ensure proper taxation of real estate income and expenses.

Intermediate5 min
10

Five-Year Rule

The Five-Year Rule primarily refers to the IRS Section 121 exclusion, allowing homeowners to exclude a significant portion of capital gains from the sale of a primary residence if they've owned and used it for at least two of the five years preceding the sale.

Intermediate6 min
11

Penalty-Free Withdrawals

Penalty-free withdrawals refer to specific distributions from tax-advantaged retirement accounts, such as IRAs and 401(k)s, made before age 59½ without incurring the standard 10% early withdrawal penalty, provided they meet strict IRS criteria.

Intermediate5 min
12

Self-Directed IRA

A Self-Directed IRA (SDIRA) is a specialized retirement account allowing investors to hold alternative assets like real estate, private equity, and precious metals, offering enhanced control but requiring strict adherence to complex IRS regulations to avoid prohibited transactions and Unrelated Business Income Tax (UBIT).

Advanced11-12 min
13

Individual Retirement Account

An Individual Retirement Account (IRA) is a tax-advantaged savings plan designed to help individuals save for retirement, offering benefits like tax-deferred growth or tax-free withdrawals.

Beginner6 min
14

Tax Planning

Tax planning in real estate involves strategically optimizing an investor's tax liabilities through proactive financial and legal decisions, leveraging deductions, credits, and deferral strategies to maximize after-tax returns and ensure compliance.

Advanced7-9 min
15

Pre-Tax Funds

Pre-tax funds are investment capital contributed before income taxes are calculated, allowing for tax-deferred growth or immediate tax deductions, commonly used in retirement accounts for real estate investing.

Intermediate2-3 min
16

Tax Deferral

Tax deferral is the legal postponement of paying taxes on investment gains or income until a future date, allowing capital to remain invested and grow through compounding.

Intermediate13-16 min
17

Tax-Free Growth

Tax-free growth refers to the increase in value of an investment or asset where the earnings, profits, or gains are not subject to taxation, allowing wealth to compound more rapidly.

Beginner2-3 min
18

Rollover IRA

A Rollover IRA is an Individual Retirement Account used to transfer funds from an employer-sponsored retirement plan, such as a 401(k) or 403(b), into an IRA, typically without incurring immediate taxes or penalties.

Intermediate5 min
19

Taxable Event

A taxable event is any transaction or occurrence that results in a tax liability, requiring an individual or entity to pay taxes to a government authority. In real estate, these often involve the sale of property, depreciation recapture, or certain refinancing scenarios.

Intermediate3 min
20

Non-Deductible Contribution

A contribution to a retirement account or investment that does not reduce current taxable income but may offer tax-deferred growth or tax-free withdrawals in the future, often used for backdoor Roth IRA conversions.

Intermediate5 min
21

Tax Reporting

Tax reporting for real estate investors involves accurately documenting all income, expenses, and capital events related to investment properties to comply with IRS regulations and optimize tax liabilities.

Intermediate6 min
22

Modified Adjusted Gross Income

Modified Adjusted Gross Income (MAGI) is a crucial metric derived from Adjusted Gross Income (AGI) by adding back certain deductions and exclusions, primarily used to determine eligibility for various tax credits, deductions, and investment-related tax rules.

Advanced8-9 min
23

Tax-Free Withdrawals

Tax-free withdrawals refer to the ability to remove funds from an investment account or sale proceeds from an asset without incurring federal or state income tax, provided specific conditions are met.

Intermediate5 min
24

Capital Gains Tax

Capital Gains Tax is a tax on the profit realized from the sale of a non-inventory asset, such as real estate, calculated as the difference between the selling price and the adjusted cost basis.

Intermediate13-14 min
25

1031 Exchange

A 1031 Exchange allows real estate investors to defer capital gains and depreciation recapture taxes when selling an investment property by reinvesting the proceeds into a new "like-kind" investment property within strict IRS timelines.

Advanced15-18 min
26

Asset Allocation

Asset allocation is an investment strategy that distributes capital across different asset classes, property types, and investment vehicles to manage risk and optimize returns according to an investor's financial goals and risk tolerance.

Intermediate5 min
27

Internal Revenue Service (IRS)

The Internal Revenue Service (IRS) is the U.S. federal agency responsible for collecting taxes and enforcing tax laws, playing a crucial role in real estate investing through income, deductions, and capital gains regulations.

Beginner2-3 min
28

Real Estate Retirement Planning

Real estate retirement planning involves strategically incorporating real estate investments into a broader retirement portfolio to generate income, build wealth, and achieve long-term financial security.

Intermediate8-9 min
29

Passive Income

Passive income refers to earnings from an enterprise in which an individual is not actively involved, typically generated from real estate investments like rental properties, REITs, or syndications, requiring minimal ongoing effort after initial setup.

Intermediate13-15 min
30

Adjusted Basis

The adjusted basis is the original cost of an asset, such as real estate, plus the cost of any capital improvements, minus any depreciation deductions and certain other adjustments. It's crucial for calculating taxable gains or losses upon sale.

Intermediate13-14 min
31

Real Estate Professional Status

Real Estate Professional Status (REPS) is an IRS designation allowing qualifying taxpayers to treat rental real estate activities as non-passive, enabling them to deduct passive losses against non-passive income and potentially reduce their taxable income significantly.

Advanced12-15 min
32

Wealth Management

Wealth management is a comprehensive financial service that combines financial planning, investment portfolio management, and other aggregated financial services to manage the wealth of high-net-worth individuals and families.

Intermediate8 min
33

Depreciation Recapture

Depreciation recapture is an IRS rule that taxes the gain from the sale of depreciated property at ordinary income tax rates, up to the amount of depreciation previously claimed, ensuring tax benefits are accounted for upon sale.

Intermediate15-18 min
34

Pro-Rata Rule

The Pro-Rata Rule dictates that allocations, distributions, or liabilities are divided proportionally among parties based on their respective ownership percentages, contributions, or claims, commonly applied in 1031 exchanges and partnership agreements.

Advanced8-9 min

Common Questions