This Is What Happens When You're Smart Early

Summary

Ramsey Everyday Millionaires

Episode Summary: "This Is What Happens When You're Smart Early"

Release Date: April 11, 2025
Host: Ramsey Network
Featuring: Dave Ramsey, Ken Coleman, Rachel Cruze, George Kamel, Jade Warshaw, and Dr. John Delony

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Introduction

In this compelling episode of Ramsey Everyday Millionaires, the Ramsey Network dives deep into the strategies and mindsets that have enabled ordinary individuals to amass extraordinary wealth. The episode titled "This Is What Happens When You're Smart Early" features a detailed conversation between a host (identified as A) and Nicholas (B), a successful real estate professional with a net worth of approximately $15 million. The discussion revolves around Nicholas’s financial decisions, particularly his approach to Roth conversions, real estate investments, and tax strategies.

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Guest Background and Financial Overview (00:20 - 01:37)

Nicholas introduces himself, outlining his impressive financial portfolio:

• Net Worth: $15 million
• Retirement: Retired at 45 after selling a medical practice
• Current Focus: Managing real estate, filing as a real estate professional
• Real Estate Holdings: Approximately $8.5 million in real estate
• Revenue: $900,000 from real estate operations
• Debt: $2.5 million at low-interest rates (~3.5%)
• Investments:
  • SEP IRA: ~$2 million
  • Brokerage Account: $2.7 million
  • Cash Reserves: $300,000

Nicholas is contemplating a Roth conversion and seeks advice on whether to utilize his real estate depreciation to offset taxes or liquidate his brokerage account to pay the associated tax liabilities.

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Roth Conversion Strategy Discussion (01:37 - 06:40)

The core of the episode revolves around Nicholas's strategy for handling a significant Roth conversion. Key points include:

• Tax Implications:

  • Nicholas faces an estimated $700k tax hit from converting his $2 million SEP IRA to a Roth IRA.
  • Depreciation Utilization: He has been using depreciation from his real estate holdings to offset income, aiming to reduce his overall tax burden.

• Host’s Perspective (A):

  • Advises against borrowing to cover the Roth conversion tax, emphasizing the importance of maintaining a debt-free position.
  • Highlights that depreciation schedules are independent of Roth conversions and reiterates the necessity of having sufficient cash to cover the tax liabilities.
  • Shares personal experience, stating, “100% of my retirement is now in Roth…I did all of that just to avoid the income tax on the growth” (03:12).

• Estate Planning Insights:

  • Roth IRAs vs. Traditional SEP IRAs:
    • Roth IRAs offer the advantage of tax-free inheritance with no required minimum distributions (RMDs).
    • Traditional SEP IRAs, under the current Secure Act, require liquidation within 10 years, potentially leading to significant tax burdens for heirs.
  • Potential Future Legislation:
    • Nicholas expresses concern over pending tax legislation affecting estate planning, acknowledging the unpredictability of future tax laws.

• Conversion Timing and Strategy:

  • Nicholas considers spreading the conversion over two to three years to manage cash flow for tax payments.
  • The host advises maintaining real estate investments separately from Roth conversions, emphasizing that each should be managed based on its own merits.

• Notable Quote:

  • Nicholas reflects on his strategy, stating, “This is what happens when you're smart early” (07:18).

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Real Estate vs. Equities Allocation (06:40 - 07:18)

The conversation shifts to asset allocation, specifically between real estate and equities:

• Host’s Experience:

  • Prefers real estate over mutual funds, noting, “my real estate’s done much better than my equities have done” (07:00).
  • Credits purchasing properties during market lows (e.g., 2008) as a key factor in his substantial real estate gains.
  • Emphasizes the importance of not being overly rigid with asset allocation, stating comfort and expertise in real estate allow for a more flexible approach.

• Nicholas's Position:

  • Acknowledges the success of his real estate investments but doesn’t mention specific plans to rebalance his portfolio, aligning with the host's sentiment.

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Key Insights and Takeaways

1. Strategic Roth Conversions:

   • Converting traditional retirement accounts to Roth IRAs can provide significant tax advantages, particularly in estate planning by eliminating RMDs and allowing for tax-free inheritance.
   • Planning the timing and funding of such conversions is crucial to manage tax liabilities effectively.

2. Real Estate as a Wealth-Building Tool:

   • Real estate investments can outperform traditional equities, especially when entered during market downturns.
   • Utilizing depreciation and strategic financing can optimize tax benefits and cash flow.

3. Importance of Financial Flexibility:

   • Maintaining flexibility in financial planning, such as holding some cash reserves and not over-leveraging debt, is vital for navigating unforeseen circumstances and legislative changes.

4. Long-Term Estate Planning:

   • Proactive estate planning, including the use of Roth IRAs, can safeguard wealth transfer to future generations, minimizing tax burdens and administrative complexities.

5. Avoiding Debt:

   • Prioritizing a debt-free financial position provides stability and reduces risk, particularly when managing substantial investments and considering large financial moves like Roth conversions.

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Conclusion

"This Is What Happens When You're Smart Early" underscores the profound impact of informed financial decisions made at a young age. Nicholas’s journey exemplifies how strategic investments, thoughtful tax planning, and disciplined financial management can lead to substantial wealth accumulation and long-term security. As the host aptly summarizes, “This is what happens when you're smart early,” highlighting the episode’s central theme of leveraging intelligence and foresight to build and preserve wealth.

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Notable Quotes

• Nicholas: “This is what happens when you're smart early.” (07:18)
• Host: “I would never borrow money to cover your Roth conversion.” (02:53)
• Host: “100% of my retirement is now in Roth … I did all of that just to avoid the income tax on the growth.” (03:12)

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This episode serves as an invaluable resource for listeners aspiring to emulate Nicholas’s success, offering actionable insights into effective wealth management, tax optimization, and strategic investment planning.

Transcript

[A]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor Nicholas is in Chicago. Hi, Nicholas, how are you?

[B]

I'm doing well, thanks. Thanks. Thank you both for taking my call.

[A]

Sure.

[B]

Calls regarding a Roth conversion that I think I'm going to do. My position and background is net worth about 15 million. I retired at 45. I sold off a medical practice. My wife is still practicing, but I've transitioned into managing our real estate. So now I file as a real estate professional. Heavy into real estate. Got about 8 1/2 million dollars worth of real estate. Spitz off 900k in revenue, about 2 1/2 million in debt, low rates, 3 1/2 or so. Sitting on a SEP of about 2 million. Brokerage account at 2.7, about 300k in cash. The question is, with the $2 million SEP, I'm looking at almost a 700k tax hit. When I convert that with my real estate professional status, if I continue to buy real estate and use the depreciation to offset my wife's income as well as that Roth conversion, should I be going about it that way or should I liquidate my brokerage account to pay the taxes on the Roth conversion? Coming up.

[A]

So how do we fund the Roth conversion on a $2 million SEP? So it's a half a million dollar problem, give or take, right? 800,000 maybe, right?

[B]

Yeah. My strategy up until this point has been two years ago, I used up all of the depreciation out of all the real estate that I've accumulated in the last six years. On just this past Tuesday, two days ago, I completed a deal on another piece of real estate. And initially I was going to go in and just pay cash for the deal. I ended up financing half of it because I wanted to hold on a little cash just in case I could do it, have a little flexibility just in case. I am facing a large tax bill on this, this rollover, this Roth. I'm 45, so you can choose the.

[A]

Year to do the Roth. You don't have to do it this year, you can do it whatever year. Right.

[B]

I understand. My intent is, you know, when I do the Roth conversion, I understand, you know, it eliminates the RMDs, but I'm not sure I'm ever going to need to touch the money. My intent is that, you know, I leave it there until I die, until my wife passes, and then we just give to the kids, you know, 30, 40, 50 years from now.

[A]

Okay? Let's stop a second. So the. No, I would never borrow money to cover your Roth conversion and that's effectively what you've done. I would get back to the debt free position number two. Depreciation schedules are independent of whether you do this conversion. You don't need depreciation schedule to do the conversion. All you need is the cash to cover the conversion, the tax liability created by the conversion. So yes, I like the idea and I've moved all of my stuff. To give you point of reference, I'm sitting on about 600 million in real estate and I moved all of my stuff to Roth and simultaneously do every year, like every year I do a match here myself at Ramsey and it has to be in traditional and then at the end of the year I roll it to Roth every year and I do backdoor Roths every year. So 100% of my retirement is now in Roth. It's not in. I don't have any traditional left. And I did all of that just to avoid the income tax on the growth. Now though, I'm sitting here at 64 and I'm looking at estate planning and I'm taking all these calls from people and the Biden administration changes the ruling on the inheritance inherited IRAs under the Secure act and you have to liquidate an inherited IRA in 10 years. And so if you leave a $2 million traditional SEP, they're going to, well, by then it may be $20 million and the kids are going to be liquidating that at $2 million a year for 10 years and getting taxed on it then. And you avoid all of that. So the RMD avoidance is excellent. But I've now come to realize I accidentally did something brilliant in my estate planning because my kids have no mandatory withdrawal. The Roth IRA passes tax free, zero tax on it, and, and no mandatory withdrawals and no nothing. So does that step up? So yeah, there's no stepped up basis because there's no basis. It's not taxable. Okay, so okay, zero tax on a Roth ira, inherited or otherwise. So but when you take this SEP and convert it to that, whatever it grows to in the future, just compound interests. Let the thing sit there and cook, you know, $2 million and you're only 45, we're talking 20, $30 million if you lived in your 70s. And that one account, and that one account then is completely tax free for your kids instead of a 10 year burden under current tax law. Now who the crap knows what's in the four and a half trillion dollar tax cut that the Congress just passed this week and has not gone through the Senate yet. So I don't know what they're going to do with all that. I have no idea. But I'm based on current facts today I feel like a genius that all mines in Roth all of that to say I'm probably just going to scrape together the cash and either do it over a two or a three year period if I have to so that I can cash flow the tax hit. Or if you've got the 800k, just do it. I'm moving this up into a Roth period and it's independent of the real estate deal and it's independent of the depreciation schedules. Those stand alone and make sense or they don't make sense on their own accord. They don't extrapolate from this discussion. Does that make any sense?

[B]

Well, I think I'm kind of using depreciation as a tool to knock down that tax bill.

[A]

Yeah, but it knocks down all of your tax bill though. You got a piece of income Property throwing off 900k, it knocks that tax bill down. Right. You don't have enough depreciation on those properties to offset the cash flow on the properties even.

[B]

No, no, I don't.

[A]

Okay. So you're going to get the use of the depreciation schedule regardless of this Roth discussion. That's my point.

[B]

Is there a typical allocation that you would say a third of my net worth should be in real estate or equities or vice versa?

[A]

No. My real estate's done much better than my equities have done. And so I've got a lot more in it as a result. I bought a bunch of stuff in 2008 at 15 and 20 cents on the dollar and it's worth so stinking much now that there's no way any mutual fund could ever keep up with that. So I mean it's like bazillion times difference. So. And I'm not going to rebalance the portfolio because the real estate kicked the mutual funds, but. No, thank you.

[B]

Understood.

[A]

But I'm also, I don't abandon either market. I'm not 100% in either one. If you want to be, that's okay. But I, and I'm very comfortable with real estate. Obviously. I'm a real estate guy by trade before I did all this 30 years ago. So anyway, you've done really well, Nicholas. I'm very proud of you. And it sounds like you're kind of enjoying it. Yeah, he seems to managing the family book of business here. That's pretty cool, dude. And you're 45 years old. You have 15 million already, and you're going to be $100 million the time you get there. If you'll just keep. Keep tinkering with it. I mean, just compound interest from 45 to. To 80. That's going to get him. Y'all just do a little math. It's pretty incredible. This is what happens when you're smart, Early. Wow. Very helpful.