Wow, I hadn't thought about the basis step-up issue at all. Does this mean I should be gifting cash rather than appreciated investments if I do start annual gifting? Or is there some strategy that lets you get the best of both worlds?

Yes, if you're going to gift, cash or high-basis assets are generally better from a tax perspective. You want to keep the low-basis (highly appreciated) assets in your estate to get that step-up when you pass. Another strategy some people use is life insurance. If you're worried about estate taxes but want to preserve the step-up, you can keep your appreciated assets and buy life insurance in an irrevocable life insurance trust (ILIT) to provide liquidity for any estate taxes. The insurance proceeds, if structured correctly, pass outside your estate and can be used to pay any estate tax due, allowing your heirs to keep more of your assets intact.

I disagree with your "use it or lose it" framing. While you can't recover unused annual exclusions, you still have your lifetime estate/gift tax exemption. So it's not like those opportunities to transfer tax-free are gone forever if you don't make annual gifts. Also, compounding works the same whether the money is in your account or your child's account. The real question is whether you think you'll exceed the lifetime exemption (even after it decreases), which most people won't.

Yep, this is critical. Texas has the same issue - my LLC that's taxed as an S-corp still has to file and pay franchise tax even though federally we're an S-corp. Cost me $3,500 I wasn't expecting my first year.

This is huge! We had to do the same thing. Our attorneys said converting from LLC to C-corp cost us an extra $11k in legal fees compared to if we'd just started as a C-corp. Depends on your longterm goals I guess.

Would this apply to a small retail business too or mainly tech startups? We might seek a small business loan but not planning on angel investors or anything fancy.

11 Is that different from the mega backdoor Roth? I've heard about that one but don't fully understand it. Something about using your 401k?

22 Yes, they're different strategies. The regular backdoor Roth is what I described - contributing to a traditional IRA then converting to Roth when your income exceeds the limits for direct Roth contributions. The mega backdoor Roth involves making after-tax (not Roth) contributions to a 401(k) plan above the standard employee contribution limit, then either converting those to Roth inside the plan or rolling them over to a Roth IRA. It requires a 401(k) plan that specifically allows after-tax contributions and in-service distributions or rollovers. The potential contribution amounts are much larger - potentially up to $40,000+ per year depending on your plan's limits and your other contributions.

16 Are there companies that help set up self-directed IRAs? My regular brokerage only lets me invest in standard stuff like stocks and ETFs.

I tried that route first. The transcript shows that Form 8606 was filed but doesn't give you the detailed line items like your non-deductible contribution amounts. It's helpful to confirm if you filed the form, but you still need the actual forms to see the specific numbers.

This seems like terrible advice if the person has a large IRA balance. You could end up paying tens of thousands in unnecessary taxes! Plus dumping a large conversion into a single tax year could push you into a higher bracket.

You're right that it's not for everyone - should have been clearer about that. It makes sense mainly for smaller balances where the potential overtaxation is less than the hassle of reconstructing years of missing records. For larger balances, it's definitely worth putting in the time to get the basis right. I should have mentioned that doing partial conversions over several years can also help manage the tax impact by spreading it across multiple tax brackets.

Do self-directed IRAs have different rules about distributions? Like could OP have done these exact investments but avoided the tax hit if they were already in a self-directed account?

Self-directed IRAs follow the same basic distribution rules as any IRA. The difference is what you can invest in while the money remains inside the IRA. If OP had already set up a self-directed IRA before making these investments, they could have made the hard money loan and purchased the rental property directly through the IRA without taking a distribution. The IRA itself would own the property and loan, keeping everything tax-advantaged. All income and gains would flow back into the IRA tax-free (for a Roth). That's the major advantage - making alternative investments while keeping the tax benefits intact.

Yes, that's absolutely true and a critical point. The IRS has strict rules against "self-dealing" transactions. You cannot sell property you already own personally to your IRA - that's considered a prohibited transaction and can result in the entire IRA being disqualified. The same applies to transactions between your IRA and any "disqualified persons" which includes yourself, your spouse, parents, children, and certain business partners. So unfortunately, once you've purchased property personally, there's no way to transfer it into an IRA without triggering these prohibited transaction rules.