Boulder, CO · Member since 2016 · 2 posts · 1 vote
I am new to bigger pockets and currently setting up a checkbook solo 401k plan with the intention of investing in real estate.
One point of confusion is how to account for Roth and and traditional funds in the bank accounts. For example, If I purchase a property with 60% Roth funds and 40% traditional funds, do I split the proceeds and expenses proportionately between the two accounts?
Of course, the goal is to have a non-recourse loan and 100% Roth ownership of the property to avoid UDFI tax. What would be the technique to get there if I purchased the property in the scenario above and then obtained a loan?
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
10y
@Jim,
If you are in the process of setting up a plan, your plan provider should be able to help you with these issues.
A Solo 401k is exempt from UDFI taxation on debt-financed real estate, regardless of whether Roth or tax-deferred funds are used.
The IRS will want to make sure that there is no squishiness in the valuation of the two sub-accounts. When an investment is made, you need to clearly document the relative proportions of Roth and Tax-Deferred funds applied, and all future income and expenses need to be allocated on that same basis.
You cannot slide the scale towards the Roth direction, other than by performing a Roth conversion on the tax-deferred portion of the account. When you do so, very good documentation of what assets and what value are being converted is critical. This is not a do-it-yourself maneuver when non-cash assets are being converted, and should involve the assistance of your CPA.
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
10y
@Jim,
If you are in the process of setting up a plan, your plan provider should be able to help you with these issues.
A Solo 401k is exempt from UDFI taxation on debt-financed real estate, regardless of whether Roth or tax-deferred funds are used.
The IRS will want to make sure that there is no squishiness in the valuation of the two sub-accounts. When an investment is made, you need to clearly document the relative proportions of Roth and Tax-Deferred funds applied, and all future income and expenses need to be allocated on that same basis.
You cannot slide the scale towards the Roth direction, other than by performing a Roth conversion on the tax-deferred portion of the account. When you do so, very good documentation of what assets and what value are being converted is critical. This is not a do-it-yourself maneuver when non-cash assets are being converted, and should involve the assistance of your CPA.
this is a common strategy that many of our clients utilize (another instance is when you used your 401k funds together with the 401k funds of your spouse). The simple solution would be to use a separate operating account for that property. Feel free to give me a call or send me a PM and I'll share the details with you.