roll over to new 401k provider or move to solo 401k?

Question

Hi BP Community!I wanted to run this buy you savvy investors on what you would do if you were given our situation. So, I have a 401k from previous company Walgreens and now I work at CVS pharmacy. I am going to be allowed to roll over 401k starting April 1 and begin max contribution.

So, our goal is real estate investing in buy &hold/wholesaling and flipping (already in the field). Our tax person mentioned that if we move it into a solo 401k then i will be taxed significantly because it will bump me up to a new tax bracket. He said it is better to just roll it over to the new 401k provider and contribute max because then that money from each paycheck will not be taxed as well. What is holding me back from being happy with this strategy is that I do not want to wait until retirement age to be able to withdraw these funds. I would like to use them asap and start acquiring properties.

HERE IS MY QUESTION: is it wise to take the loss and move it to a solo 401k so we can use it to invest or just roll it over and not make it so complicated?

Any help would be appreciated and hope this all made sense.

Logan Allec · Answer

@Alexander Quan Generally, a Solo 401(k) can accept tax-free rollovers from your former employer's 401(k), even a Roth 401(k). (But not a Roth IRA.) It sounds to me like unless there are some missing facts here, or I'm misinterpreting your statement, your "tax person" who suggested that rolling your former employer's 401(k) into a Solo 401(k) would be a taxable event isn't aware of the rules.

It sounds like you are eligible for a Solo 401(k) since you have self-employment income from being a real estate agent and flipping from which you can make contributions into your Solo 401(k)

And you can certainly buy properties in your Solo 401(k), so your goal of using your 401(k) funds ASAP to start acquiring properties is very doable assuming you qualify.

Do you really need these funds before retirement? It sounds like you have a good career in pharmacy and other streams of income on top of that, so why take the net worth hit of taxes and penalties if you don't have to and can reach your real estate goals within the Solo 401(k) while enjoying tax-deferred wealth building?

The cumulative effects of paying tax on your profits every year is underestimated by most — we're talking tens if not hundreds of thousands of dollars for even a modest investor over 30 years or so — and being able to defer those taxes for decades so as to reinvest all profits will be a boon to your net worth and financial position.

Also, be wary of "flipping," per se, in your Solo 401(k) as you could come under the purview of the UBTI rules, with the result that you would have to pay tax, and the whole point of investing through a 401(k) is to defer tax. Buy and hold is generally safer in the Solo 401(k), or possibly fixing up a property, renting it for a time, and then selling it so it's not "flipping," per se.

And of course you always have to watch out for the prohibited transactions and make sure you keep good records for your accounts and work with a banker who knows what they're doing.

@Dmitriy Fomichenko is an expert in this space. He happens to be in Orange County and could probably talk you through your options.

Brian Eastman · Answer

@Alexander Quan

I would agree with @Logan Allec in that either the dots are not being connected or there is a mis-understanding.

You should be able to establish a Solo 401(k) and rollover the current funds to that new plan with no tax implications. You can then participate in the CVS 401k as an employee of that company and separately in your own Solo 401(k) as an employee of your business (realtor).

The Solo 401(k) can be used to diversify that pile of tax-sheltered savings. So, if you feel you can get better results for that money in real estate and lending, then a Solo 401(k) would be a good option. If not, then just roll the funds to the CVS plan.

However, you cannot "use" the money for your own purposes. A self-directed retirement plan (IRA or 401k based) is still a retirement plan with all the same rules about access. This is just a means to get better results growing that money for your future retirement.

Brian Eastman · Answer

@Alexander Quan

With respect to whether your wife should contribute to her employer 401k plan, that is really a question for your licensed financial or tax advisor. The answer will depend on a whole lot of variables such as age, income, goals, tax bracket, etc.

Generally speaking, contributing to an employer plan at least to the level they match is smart, as you get both a tax deduction and an immediate 100% ROI with the match.

Alexander Quan · Answer

@Logan Allec & @Brian Eastman I thank you for the great input you both have given me. You both are correct in that there was missing info, as the 401k holder is my fiance as she was the one that has recently switched companies. I am the agent. Looks like since she does not do part time work and has agreed to let me figure out what is the best solution for us collectively, it seems according to @George Blower that we should look into self-directed IRA.

Brian Eastman - thank you for pointing out to me regarding all these options in that it is still for retirement. I really need to understand it more. I am assuming that if we use the money say from Self-directed IRA then the money that is used/made must go back to the self-directed IRA?

Let's say we go the self-directed IRA route. With her new employer at CVS, would you opt-in to contributing max to 401k or should we put the money into self-directed IRA or just take the money in the bi-weekly paycheck so we can use the money now? I cannot thank you enough for your time and assistance

George Blower · Answer

@Alexander Quan

In order to open a solo 401(k) plan you have to be performing self-employment activity at least on a part-time basis. Here is what page 5 of IRA Publication 560 states:

https://www.irs.gov/pub/irs-pdf/p560.pdf

However, if you are not self-employed, you may want to open a self-directed IRA and transfer the former employer plan into it. You can then invest the self-directed IRA in real estate.

roll over to new 401k provider or move to solo 401k?

roll over to new 401k provider or move to solo 401k?

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