Converting previous employer 401k to SDIRA or soloK

[Alex Bejenaru]

Hi Everyone,

I currently have a 401k through my previous employer with about $65k and would like to put it to use in my house flipping business. Is it possible to self direct those funds towards my business in anyway? Can I set up a note or TD against a specific property to help it grow tax free? I'm hearing mixed answers in regards to being able to do it without getting taxed like crazy. 

[Brian Eastman]

@Alex Bejenaru

You may not, with a self directed IRA or Solo 401k, use that money for YOUR business. Any investments with such a tax sheltered retirement plan need to be done entirely at arms length. The plan could purchase a home or provide a hard money loan, but you personally could not be involved in the project other than in an administrative role, and you may not receive any benefit or compensation. All returns go to the plan.

And yes, when a retirement plan or other tax exempt entity engages in a trade or business such as flipping or developing spec homes, there is a trust tax that applies to the gain. The idea is that if we allow tax exempt entities to compete against tax paying businesses with an unfair advantage, we'll have no tax paying businesses. Passive investments are not taxed in this manner. Of course, there are cases where even with taxes on a flip with an IRA, you can get better returns for the IRA than with other investments, so it can still make sense.

A different kind of structure known as a Rollover as Business Startup would allow you to rollover that 401k into shares of a C corporation in which you can be the owner operator, be directly involved, and draw a salary.  That looks to be more in line with your goals.  That said, $65K is not much seed money for a flipping business in southern California, and the cost and complexity of the structure may not be worth it unless you also have a good chunk of personal funds to put into the entity as well.