Rollover SD-IRA to Solo 401k??

Question

Hello BP'ers! A few questions for the tax experts. For reference, I work full time and have started buy and hold rentals for long term investments/wealth building. I currently have a Roth SD-IRA. I'm finding the unleveraged ROI on rentals to be subpar, though want to avoid UBIT from non-recourse loan income. From what I've read, I may be eligible to start a solo 401k if I report income from a business outside of rentals, ie- consulting or services offered.

1- Is there a minimum amount I'd need to earn/report to qualify for the solo 401k?

2- Is there a way to roll over the Roth SD-IRA to a solo 401k account?

Thanks in advance for any suggestions!!

1- Is there a minimum amount I'd need to earn/report to qualify for the solo 401k?

2- Is there a way to roll over the Roth SD-IRA to a solo 401k account?Thanks in advance for any suggestions!!

Bernard Reisz · Answer

@Justin Windham @Brian Eastman @Todd Goedeke haven't nearly as present on BP as I'd like to be, recently. Poking around the forums the last few days, I'm amazed at how the misinformation that's so pervasive elsewhere on the internet has made inroads to BP, as well. Nevertheless - thanks to you - BP remains one of the few places where if someone presents misinformation on these topics (QRP, EQRP, UBIT, UDFI, etc.), they can get still get honest and fact-based responses. Kudos!

Justin Windham · Answer

@David New

Be careful with what you're stating. A Roth IRA cannot be transferred to a qualified plan.

Brian Eastman · Answer

@David New

An "eQRP" as the firm you mention wants to market their plan is overkill for an investor with nominal self-employment income and no employees.

It also has the same inability to receive an inbound rollover of funds from an existing Roth IRA.

Brian Eastman · Answer

@Erin M.

There are no good books I am familiar with on this topic.  Working directly with licensed counsel is the only way to go, as you will want to plan according to the specifics of your situation.

Many folks have that 37% number in their heads based on reading the internet.

Yes, the maximum tax bracket for trusts (which the IRA is) is 37%.

What is not correct is the assumption that if your investment is 65% debt-financed, then 65% of the income will be taxed at 37% rates.  If that were the case then nobody would use leverage.

When an IRA engages in a debt-financed investment the portion of income that is derived from the borrowed funds is considered taxable - so 65% of gross rental income in my example.

However, you have a $1,000 exemption off the top, and then get to apply the same ratio - in this case 65% - of all the normal deductions like interest on the note, depreciation, property taxes, etc. to reduce the amount of income that is taxable.

The net taxable income will then generally be a pretty low number.  Maybe $1,000 - $2,000 on a typical single-family in the $100K to $250K price range.  The tax bill on that income will be at a rate of 10% and might add up to a few hundred dollars.  An investor working with more capital in larger properties may see more income, and even a boost in rates to 24% or even 37% on some of that income, but the effective tax rate relative to the entire investment will still be low since only a small fraction is actually considered taxable.

So, maybe $200/year in taxes to bring leverage into a deal and boost the return by several percentage points and several thousands of dollars.  It is a pretty good way to accelerate growth in an IRA.

David New · Answer

@Erin M.

You would be looking for a eQRP. It’s essentially a solo self directed 401k allowing you to avoid unit taxes and you can convert your IRA in it. Check out https://www.totalcontrolfinancial.com/

Hope that helps.

Todd Goedeke · Answer

@Erin M., talk to someone licensed to give tax advice and who knows your tax situation.

Erin M. · Answer

@Brian Eastman Thank you!

Erin M. · Answer

Thanks for the replies!  @Brian Eastman are there any books, websites, or readings you could direct me to on how to limit UBIT exposure on leveraged rental income. I'm reading up to 40% tax!  Thanks in advance

Justin Windham · Answer

Ok, that makes more sense. The original poster in this thread indicated she has a Roth IRA, so a Solo 401k or other qualified plan is not an option for those funds.

Justin Windham · Answer

@David New

Are you saying they helped you transfer a Roth IRA to qualified plan or you have a self-directed Roth IRA with them?

Rollover SD-IRA to Solo 401k??

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