Should or how can I use my 401K for my first deal?

4 Replies

I've currently got a 401k with my full time employer (also part time RE agent). About 2 years ago I decided to change my allocations to Roth 401k. However, 8 years of automatic enrollment had me in the pre-tax plan and there is a decent amount in my pre-tax plan. I called the 401k plan administrators and they said that currently my plan does not allow me to convert those pre-tax dollars into the Roth plan. Being head of the IRA department at my full time job, I know darn well that anyone can convert a Traditional to a Roth through your standard accounts at the bank. Yes you will pay taxes on it as income but you can remove the principal amount of that plan any time you want without IRS penalty. My plan was to convert my entire 401k plan to Roth, and remove a portion of principal to pay a down payment on a property. Thoughts?

@Randy Marshall

401k plans allow for an in-plan Roth transfer, but not all plan administrators support this option.  Even if your plan did allow for a Roth transfer, you may not be able to take distributions from the Roth portion of your plan prior to leaving your job or reaching age 59 1/2.

To my thinking, paying the taxes to change tax-deferred retirement savings to Roth status, only to immediately take a distribution is a non-starter.  The benefit of the Roth treatment is the tax-free growth you can earn while keeping the money working in the retirement plan.

If your goal is to purchase a property personally, a 401k participant loan may be a better route, assuming you have access to such.

As a self employed realtor, you may wish to explore the idea of a Solo 401k plan.  You could contribute on a Roth or tax deferred basis from your real estate commission earnings and invest the plan directly into real estate or related assets such as notes.  It would take a bit of time to build up some capital, but could provide an option to have some tax-sheltered retirement savings in real estate.

Medium safeguard rgb stackedBrian Eastman, Safeguard Advisors | [email protected] | 855‑997‑2298 | http://www.ira123.com

Take a look at Sun West Trust's website. They provide administration services for IRA accounts that are used for alternative investments, such as real estate. Beware, however, that it's a fairly complex process and if you use your funds as merely a down payment on investment real estate, then you fall into the realm of Unrelated Business Income Tax (UBIT). It's complex and if you're not careful you could get the IRS on your tail.

Originally posted by @Brian Eastman :

@Randy Marshall

401k plans allow for an in-plan Roth transfer, but not all plan administrators support this option.  Even if your plan did allow for a Roth transfer, you may not be able to take distributions from the Roth portion of your plan prior to leaving your job or reaching age 59 1/2.

To my thinking, paying the taxes to change tax-deferred retirement savings to Roth status, only to immediately take a distribution is a non-starter.  The benefit of the Roth treatment is the tax-free growth you can earn while keeping the money working in the retirement plan.

If your goal is to purchase a property personally, a 401k participant loan may be a better route, assuming you have access to such.

As a self employed realtor, you may wish to explore the idea of a Solo 401k plan.  You could contribute on a Roth or tax deferred basis from your real estate commission earnings and invest the plan directly into real estate or related assets such as notes.  It would take a bit of time to build up some capital, but could provide an option to have some tax-sheltered retirement savings in real estate.

 Im currently doing real estate part time until I can build enough capital to make the jump to full time. However, I'd like to build that capital also with RE investments instead of just sales.

If I can allocate the pre-tax dollars into ROTH, it will trigger a tax consequence but I'm willing to pay that. Then, I should (unless the plan rules state otherwise) be able to remove the ROTH principal dollars without any IRS penalties, regardless of age. With a Roth you can remove principal at any time without IRS penalties. IRS penalties should only come when I remove earnings before a 5 year roth holding period has been met and/or before the age of 59 1/2. But principal can be removed anytime without IRS penalties. That is why Im trying to allocate all the funds under the ROTH, so I can have access to the principal.