How to convert to self directed 401K

Question

If I am actively contribute to my 401k with my current employer, is that mean I can't convert that to self directed 401k?

Dmitriy Fomichenko · Answer

@Joe Au

If you switch job this 401k now becomes old employer 401k and at that time you will be eligible to roll it over into a self-directed IRA or Solo 401k. You can only setup Solo 401k if you are self-employed or own a small business with earned income, it is not for everyone.

If you wish to convert to Roth IRA be prepared to pay the taxes since this would be a taxable event.

Dmitriy Fomichenko · Answer

@Joe Au

company match would be considered pre-tax, not post tax. Together with your pre-tax contributions those funds can be rolled over into Traditional IRA or pre-tax Solo 401k, if and when you are eligible.

Post tax contributions can be rolled over into Roth IRA or Roth Solo 401k account.

Joe Au · Answer

I forgot to mention, my 401K has 3 sources of contribution. It's pre tax, post tax and company match. And I think the company match part is consider as pre tax.

So that would be roth 401k to roth IRA without paying any more tax. Than pre tax and company match from 401k to traditional IRA. Is that right?

Joe Au · Answer

Thanks @Mark Nolan, i didn't know the differences between the 2 products.

Mark Nolan · Answer

@Joe Au

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate,  precious metals tax liens, promissory notes, private company shares,  and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions; and
• Both are prohibited from investing in assets listed under I.R.C. 408(m).

The Self-Directed IRA and Solo 401k Differences

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company ( IRA LLC) must be utilized;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2016; the  solo 401k contribution limit is $53,000, whereas the self-directed IRA  contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or  custodian of her IRA; instead, a trust company or bank institution is  required;
• When distributions commence from the solo 401k a mandatory 20% of  federal taxes must be withheld from each distribution and submitted  electronically to the IRS by the 15th of the month following the date of  each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g.,  former employer 401k) to a solo 401k are not reported on Form 5498, but  rather on Form 5500-EZ, but only if the air market value of the solo  401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a  self-directed IRA, the amount deposited into the self-directed IRA is  reported on Form 5498 by the receiving self-directed IRA custodian by  May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an  IRA to a Solo 401k or self-directed IRA are reported on lines 15a and  15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a  planning perspective, it may be advantageous to transfer Roth Solo 401k  funds to a Roth IRA before turning age 70 ½ in order to escape the Roth  RMD requirement applicable to Roth 401k contributions including Roth  Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

Justin Windham · Answer

@Joe Au

If you do changes jobs, you'll probably want to take that opportunity to transfer your 401k to an account that allows you to do what you'd like (a self-directed IRA or 401k).

If you transfer the 401k to a Roth IRA, not only is this a taxable event, as Dmitriy pointed out, but it is also permanent in that you cannot transfer the Roth IRA to a Solo 401k. If you are eligible for a Solo 401k, you will get a better structure than the IRA and if you want to do a Roth conversion, you can do so within the plan. The Solo 401k's Roth component does allow for transfer to a Roth IRA, so your flexibility is maintained in that scenario. Going to a Roth IRA first leaves you with fewer options.

Joe Au · Answer

My plan don't allow me to convert to solo 401k while I am actively contributing to it. However, I can borrow 50% of my balance from it.

So let's say i switch job, should i convert the 401K to Roth IRA and IRA, and then do a self direct IRA, or should I just convert 401k to solo 401k? Does this question make sense?

Justin Windham · Answer

@Joe Au

Definitely check to see if your plan allows for in-service distributions, as others have mentioned. Some others in your situation have opened a Solo 401k (eligibility requirements exist) and contributed to that instead of the employer plan or in additional to it. If you contribute to both, contributions for the employee deferral must be aggregated. Also keep in mind contributions to the Solo 401k must come from earned income from self-employment. With all those facts in mind, whether you would benefit enough from a self-directed 401k to start one now likely depends on your current plans rules regarding in-service distributions as well as how much you may have in self-employment income.

Mark Nolan · Answer

@Joe Au

The following generally applies.

Employer Contributions: Employer Contributions  may be distributed upon the 401k participant’s severance from  employment, death, or disability. In addition, Employer contributions  may be withdrawn upon the occurrence of any of the following events:

1) The occurrence of a Hardship,

2) The attainment of age 59 ½

3) The Employer Contributions being withdrawn have been accumulated in the  401k Plan for at least 2 years; or

4) The Participant has participated in the  401k Plan for at least 5 years.

• Salary Deferrals (employee contributions). Any  employee contribution (including any earnings on such amounts) may not  be distributed prior to the  401k Participant’s severance from  employment, death, or disability. However, the 401k Plan permits an  in-service distribution of such amounts upon attainment of age 59 ½ or  upon a Hardship.

See following:

https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules

How to convert to self directed 401K

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