Many doctors reach their late 50s or 60s in a strong financial position.
After decades of hard work and consistent saving, they have built up a sizable nest egg in traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, defined benefit plans, or other pre-tax retirement accounts.
That is a great place to be.
But there is one problem.
If most of that money is in pre-tax retirement accounts, it has not been taxed yet.
That means every dollar you take out in retirement is generally taxable. And once required minimum distributions begin, you may be forced to take money out whether you need the income or not.
This is where Roth conversions enter the conversation.
A Roth conversion allows you to move money from a pre-tax retirement account into a Roth account. The benefit is that future qualified withdrawals from the Roth account can generally be tax-free.
But there is a tradeoff.
The conversion itself usually creates taxable income in the year you do it.
So if you convert $250,000 from a traditional IRA into a Roth IRA, that $250,000 may be added to your taxable income for the year.
For many doctors, that tax bill is what stops them.
They understand the long-term benefit of getting money into a Roth account. They like the idea of reducing future required minimum distributions. They like the idea of creating more tax-free income later in retirement. They may even like the idea of leaving Roth assets to their heirs.
But they do not like the idea of writing a large check to the IRS today.
That is where real estate can be a strategic tool.
When done correctly, rental property investing can create losses that offset the taxable income from a Roth conversion. In some cases, that can allow you to complete a Roth conversion while paying little to no tax on the conversion itself.
That is the strategy we’ll explore in this article.
What Is a Roth Conversion?
A Roth conversion is when you move money from a pre-tax retirement account into a Roth account.
For example, you might convert money from a traditional IRA, SEP IRA, SIMPLE IRA, 401(k), or 403(b) into a Roth IRA or Roth 401(k).
The benefit is that once the money is in the Roth account, future qualified withdrawals are generally tax-free. Roth accounts can also give you more flexibility later in retirement because you have more control over which accounts you draw from and when.
This can be especially valuable for doctors who have spent decades building large pre-tax retirement balances.
Without planning, those pre-tax accounts can eventually create large taxable distributions in retirement.
This becomes especially important once required minimum distributions, or RMDs, begin. RMDs are the amounts the IRS requires you to withdraw from certain retirement accounts each year. For many taxpayers, RMDs currently begin at age 73. The amount you are required to withdraw is based largely on your account balance and your age. In general, the larger your pre-tax retirement balance and the older you get, the more the IRS requires you to withdraw.
For example, if you enter retirement with several million dollars in pre-tax retirement accounts, your RMDs could eventually create hundreds of thousands of dollars of taxable income each year, whether you need that income or not.
Roth conversions allow you to move some of that money into a tax-free bucket before required minimum distributions begin.
But the key word is planning.
A Roth conversion is generally taxable in the year you do it. So the goal is not simply to convert as much as possible. The goal is to convert strategically, ideally during years when you can manage or reduce the tax impact.
For doctors after 55, this often means looking at the years when you are cutting back clinically, semi-retired, or retired, but before required minimum distributions begin.
In some cases, cutting back sooner can actually create a longer runway for Roth conversions. If your clinical income drops before RMDs begin, you may have more room to convert pre-tax retirement money into Roth accounts. And if you are also using rental property losses through REPS, those losses may help shelter the conversion income.
That tax savings is real money. It can be thought of as additional wealth for retirement because it allows more of your money to stay with you instead of going to taxes.
In other words, cutting back is not only a lifestyle decision. When coordinated with real estate and Roth conversion planning, it can also become a tax strategy.
Those years can create a valuable planning window.
And if you can combine that planning window with real estate losses and Real Estate Professional Status, the strategy becomes even more powerful.
The Problem: Roth Conversions Create a Tax Bill
Roth conversions are attractive because they can create more tax-free income later.
But they usually create taxable income today.
That is the tradeoff.
If you convert $250,000 from a pre-tax retirement account into a Roth account, that $250,000 is generally added to your taxable income for the year. Depending on your other income, that conversion could push you into a higher tax bracket and create a much larger tax bill than you expected.
This is why many doctors hesitate.
They understand the long-term value of Roth accounts. They like the idea of reducing future required minimum distributions. They like the idea of having more tax-free income later in retirement.
But they do not want to pay a massive tax bill now to get there.
The tax impact can also extend beyond federal income taxes. A large Roth conversion may affect state income taxes, Medicare premiums, and other income-based calculations.
That does not mean Roth conversions are a bad idea.
It means they need to be planned carefully.
The goal is not simply to convert as much as possible. The goal is to convert strategically, ideally in a way that reduces the tax cost of the conversion.
This is where rental property investing can change the equation.
Where Real Estate Comes In
This is where rental property investing can become a strategic tool.
Rental properties often create tax losses because of depreciation. Depreciation is a tax deduction that allows you to write off the value of the building over time, even if the property is producing cash flow.
This is one of the unique benefits of rental property investing.
You could own a property that puts money in your pocket, but on your tax return, it may show a loss because of depreciation.
However, there is an important limitation.
Normally, those real estate losses cannot be used to offset income from a Roth conversion because of IRS rules.
That is why Real Estate Professional Status matters.
As we covered in the previous article, REPS is the tax status that can unlock this benefit. If you qualify for REPS and materially participate in your rental activities, your rental property losses may be able to offset income they normally could not offset.
That includes income from a Roth conversion.
For example, let’s say you convert $250,000 from a traditional IRA into a Roth IRA. Normally, that $250,000 would be added to your taxable income for the year.
But if your rental property investing creates $250,000 of losses and you meet the REPS criteria, those losses may be able to offset the conversion income.
In that scenario, you could potentially move $250,000 into a Roth account while paying little to no federal income tax on the conversion itself.
That is the power of coordinating Roth conversions with rental property investing and REPS.
The strategy is not simply:
“Do a Roth conversion.”
The strategy is:
Use rental property investing to create losses, qualify for REPS, and use those losses to reduce the tax cost of moving pre-tax retirement money into a Roth account.
Why This Strategy Fits Doctors After 55
This strategy is especially relevant for doctors after 55 because rental property investing often becomes more accessible.
Earlier in your career, real estate may have felt harder to fit in. You may have had a high income, but not much time. You may have been focused on building your career, raising a family, paying down debt, saving for college, buying your first home, or simply keeping up with the demands of medicine.
But after 55, the picture can look different.
You often have more resources, more access to capital, more borrowing strength, and a clearer sense of what you want your money to do. And as you cut back clinically or enter retirement, you start to get your time back.
That timing matters.
You have access to a tool right when you may need it most: rental property investing paired with Real Estate Professional Status. Together, they can help reduce the tax cost of Roth conversions and make your retirement strategy more tax-efficient.
For many doctors after 55, this is the moment when real estate starts to become more than an investment.
It becomes a strategic part of retirement tax planning.
A Simple Example
Let’s look at how this could work.
Dr. Smith is 62 and semi-retired. She has built up a large balance in her pre-tax retirement accounts, and she wants to begin moving some of that money into a Roth account before required minimum distributions begin.
She decides to convert $300,000 from a traditional IRA into a Roth IRA.
Normally, that $300,000 conversion would be added to her taxable income for the year.
But Dr. Smith also owns rental properties.
Through depreciation and other rental property deductions, her properties create $300,000 of tax losses. She also qualifies for Real Estate Professional Status and materially participates in her rental activities.
Because of that, those rental losses may be able to offset the taxable income from the Roth conversion.
The result?
She moves $300,000 from a pre-tax account into a Roth account and potentially pays little to no federal income tax on the conversion itself.
That money is now in a Roth account, where future qualified withdrawals can generally be tax-free.
This is a simplified example, and real life is always more nuanced. The outcome depends on the details, including the properties, depreciation, income, documentation, state taxes, and the rest of the tax return.
But the example shows the core idea:
Real estate losses, when paired with REPS, can help reduce the tax cost of Roth conversions.
Common Mistakes to Avoid
This strategy can be an effective tool, but there are a few things to watch out for.
The first mistake is assuming rental losses automatically offset Roth conversion income.
As we discussed in the example above, the key is the combination of rental losses, Real Estate Professional Status, and material participation. Without that combination, you may not be able to use those losses to shelter the conversion income.
Another common mistake is doing Roth conversions without coordinating them with your real estate strategy. If the conversion happens in one year and the rental losses happen in another, you may miss the opportunity to use those losses when they are most valuable.
A third mistake is waiting until tax time to figure it out. REPS is based on what you do during the tax year. By the time you file your taxes the following year, it is already too late to go back and create the hours, participation, or documentation you needed.
Finally, do not buy real estate just for tax benefits. The property still needs to make sense as an investment. Tax savings are powerful, but they do not turn a bad deal into a good one.
This is why education matters so much. If you understand how the strategy works before you start, you can make better decisions about your Roth conversions, your rental property investments, and the role real estate should play in your retirement plan.
Ready to Learn How Real Estate Can Support Your Retirement Tax Strategy?
If you are thinking about Roth conversions, Real Estate Professional Status, or using rental property investing to create a more tax-efficient retirement, education is the place to start.
This is exactly why we created Zero to Freedom.
Zero to Freedom is our signature course and community for doctors and high-income professionals who want to build wealth through rental property investing.
Inside Zero to Freedom, you’ll learn how to choose a market, analyze deals, build your team, understand the tax benefits, and create a rental property strategy that supports your version of financial freedom.
We teach Zero to Freedom live twice a year, and enrollment opens for a limited time.
[Disclaimer: We are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
