Tax Law ✦ Retirement & Self-Directed IRAs
Retirement Accounts Are Tax Contracts. Read Yours Before It Reads You.
Every dollar in a traditional account is a deferred tax bill with the rate still blank; every self-directed IRA is one prohibited transaction away from becoming fully taxable overnight. North Star Law Firm helps New Mexico savers and business owners fill in those blanks deliberately, with the legal and tax analysis in one place.
Overview
What does retirement tax planning actually decide?
Not whether to save, but in which tax wrapper and when to pay. Traditional accounts deduct now and tax later at unknown rates; Roth accounts tax now and never again; taxable accounts get capital gain rates and the step-up at death. The planning is sequencing: filling low brackets with conversions in the gap years between retirement and required distributions, choosing which accounts fund which years of spending, and pointing each asset at the account where its tax character is cheapest. New Mexico adds a friendlier backdrop than its neighbors admit: Social Security benefits are exempt from state tax for most retirees, income under $100,000 for single filers and $150,000 for joint filers, and the state’s bracket structure keeps middle retirement incomes in the 4s rather than the 5.9 top rate.
- Roth conversion modeling: how much, which years, at what bracket cost
- Solo 401(k) and cash balance design for owners and the self-employed
- RMD planning, QCDs, and charitable sequencing after 73
- Self-directed IRA structures reviewed before the deal, not after
- Prohibited transaction and UBIT exposure analysis (§§ 4975, 511-514)
- Inherited IRA payout strategy under the 10-year rule
The Window
Why are the years between retiring and RMDs so valuable?
Because for many New Mexicans they are the lowest-bracket years of adult life: wages gone, Social Security perhaps delayed, required minimum distributions not yet started at age 73. Every one of those years is a container that can be filled with Roth conversions at 12 or 22 percent federal rates instead of the higher rates RMDs will force later, and each conversion also shrinks the future RMD base and the eventual tax bomb inside an inherited IRA. The modeling has real tripwires, Medicare IRMAA surcharges two years later, the Social Security taxation stack, the state exemption thresholds above, so “convert to the top of the bracket” is a slogan, not a plan. We run the year-by-year numbers, then execute.
| Account move | Best when | Watch out for |
|---|---|---|
| Roth conversion | Gap years, market dips, low-income years | IRMAA cliffs; pushing SS into taxability; NM exemption thresholds |
| Qualified charitable distribution | Age 70½+, charitably inclined, taking RMDs | Must go direct from IRA to charity; per-year limit applies |
| Solo 401(k) / cash balance plan | Self-employed with strong profit years | Deadlines, top-heavy testing when employees exist |
| Asset location shuffle | Bonds and REITs to deferred; growth to Roth and taxable | Transaction costs; wash sale timing |
What makes self-directed IRAs so dangerous?
The same feature that makes them attractive: they hold real assets, rentals, private notes, closely held business interests, and real assets invite the owner to act like an owner. The prohibited transaction rules of I.R.C. § 4975 forbid nearly any dealing between the IRA and “disqualified persons,” you, your spouse, your parents, your kids, and entities you control. Personally repairing the IRA’s rental, lending its cash to your own company, guaranteeing its loan, staying a night in its property: each is a prohibited transaction, and the sanction is not a fine but disqualification, the entire IRA treated as distributed as of January 1 of the year of the violation, with tax and penalties on all of it. The checkbook-control LLC structures sold online multiply the ways to slip. We review the structure and the intended transactions before money moves, because after the violation there is very little left to fix.
What is UBIT, and why is your IRA suddenly filing a tax return?
Tax-exempt accounts still pay tax on two things: income from an active business held inside them, and unrelated debt-financed income under § 514, which catches the leveraged rental strategies popular with self-directed investors. An IRA that buys a rental with 60 percent mortgage financing owes UBIT on roughly 60 percent of the net income and, on sale, that share of the gain, filed on Form 990-T at compressed trust rates. Sometimes the leverage still makes sense; often a solo 401(k), which is exempt from the debt-financed rule for real estate, is the better wrapper for the same deal. That single distinction has saved clients more than any exotic strategy on the internet.
How should business owners stack retirement plans?
A profitable owner-only business can shelter far more than the IRA crowd realizes: employee deferrals plus employer profit-sharing in a solo 401(k), and where cash flow is strong and steady, a cash balance plan layered on top can push six-figure annual deductions for owners in their fifties. Plan design interacts with everything else on this page and with the entity structure: S corporation W-2 wages set the contribution ceiling, and the PTE election changes the state-side value of the deduction. Design once, coordinate annually.
The Attorney-CPA Difference
Wealth advisors sell products. We run the tax math.
- Conversion and withdrawal sequencing modeled against IRMAA, SS, and NM thresholds
- SDIRA deals reviewed against § 4975 before signatures
- Form 990-T and UBIT exposure calculated, not discovered
- Plan design coordinated with entity, payroll, and the PTE election
Questions & Answers
Retirement and SDIRA questions, answered
Does New Mexico tax my Social Security?
Not for most retirees. Benefits are exempt when income is at or below $100,000 for single filers or $150,000 for married filing jointly. Above those lines the benefits become taxable at the state level, which makes the thresholds themselves a planning target when sizing conversions and withdrawals.
Can my self-directed IRA buy a rental and have my LLC manage it?
If the LLC is yours, that management arrangement is dealing between the IRA and a disqualified person, squarely prohibited. Third-party management, arm’s length in every respect, is the safe pattern. The rule of thumb: you may direct the IRA’s investments, but neither you nor your family may touch, use, work on, or profit from them.
Is a Roth conversion worth it if I’ll retire in a lower bracket anyway?
Sometimes the honest answer is no, or only partially. Conversions win when today’s rate is at or below the rate the money would eventually face, including the heirs’ rates under the 10-year inherited IRA rule. That comparison is arithmetic, and it deserves actual numbers rather than a product pitch.
I inherited an IRA from my father. What changed with the 10-year rule?
Most non-spouse beneficiaries must now empty the account within ten years, and when the original owner had begun RMDs, annual distributions are generally required along the way. Spreading withdrawals against your own bracket picture, rather than taking a year-ten lump, is usually worth thousands.
My advisor says the solo 401(k) paperwork doesn’t matter much. True?
False in the ways that hurt: late adoption, missed deferral elections, no plan restatements, and the debt-financed real estate advantage all live in the documents. A plan that exists only as a brokerage account and good intentions fails exactly when the dollars are biggest.
The blank in your deferred tax bill gets filled in either way. Fill it in on purpose.
Bring the account statements and last year’s return. You will leave with a conversion map, a withdrawal order, and a straight answer on any self-directed deal you are considering.