Transitioning IRA and old 401(k) to Self-Directed IRA

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Transitioning IRA and old 401(k) to Self-Directed IRA

Nathan Yee
Porter Ranch, CA · Member since 2015 · 51 posts · 13 votes

Hello BP Community,

I'm looking clarify the following questions:

What would the tax/penalties (if applicable) be for rolling over 1) my ROTH IRA and 2) my old, traditional employer 401(k) into a Self-Directed ROTH IRA? What are my max contribution limits? (I'm under 59 1/2 years old). 

Based on my research, I'm currently thinking that there are no tax/penalties for a ROTH IRA rollover and you'd pay ordinary income tax (via 1099), but with no penalties for a traditional 401(k) to Self-Directed ROTH IRA conversion. As far as max contribution limits, I'm under the impression the max amount I can contribute is $5500 (2017) and that this contribution would be across all ROTH retirement accounts.

Lastly, if I qualify later in life for a Solo-401(k), can I convert an existing Self-Directed ROTH IRA to a Solo-401(k)?

Based on my research, I'm thinking I don't qualify based on IRS rules: 

https://www.irs.gov/pub/irs-tege/rollover_chart.pd...

Background:

I'm looking to set up a Self-Directed ROTH IRA for the following reasons: 1) I believe I'll be in a higher tax bracket later in life and 2) I'm focusing on investing in large MF syndication deals as a limited partner. Although I love the benefits of a Solo 401(k), I don't qualify to set one up - I'm currently a W2 with no additional sources of income. The Self-Directed IRA seems to be the next best thing.

I appreciate everyone's help/input on this!

-Nate

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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Nathan,

There are no tax or penalties for transferring Roth IRA into Self-directed Roth IRA. Your employer 401k however can not be transferred directed to a Roth IRA. Those funds are pre-tax and Roth IRA is post tax. You have to do it in two steps:

1) Rollover your 401k into Traditional IRA (pre-tax to pre-tax). If your 401k is with the past employer you should have no problems doing this. However if you have a 401k with the current employer most likely they will not allow you to rollover those funds while you are employer there.

2) The second step is to do the Roth conversion - converting your Traditional IRA into a Roth. There are no penalties to do so but the amount of conversion will be taxable event. You are correct - the custodian will issue a 1099 to you reporting that as an income to you in the year of conversion.

After you complete those two steps above you will be able to do a transfer of your Roth IRA into Self-directed Roth IRA.

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    8y

    @Nathan Yee

    A Roth IRA cannot be transferred to a Solo 401k. Generally, when you convert pre-tax funds to Roth, the amount converted is added to your taxable income for the year. The amount of tax you pay will depend on your total income, tax bracket, any deductions, etc. Your tax advisor can help you with the specifics.

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    Nathan,

    There are no tax or penalties for transferring Roth IRA into Self-directed Roth IRA. Your employer 401k however can not be transferred directed to a Roth IRA. Those funds are pre-tax and Roth IRA is post tax. You have to do it in two steps:

    1) Rollover your 401k into Traditional IRA (pre-tax to pre-tax). If your 401k is with the past employer you should have no problems doing this. However if you have a 401k with the current employer most likely they will not allow you to rollover those funds while you are employer there.

    2) The second step is to do the Roth conversion - converting your Traditional IRA into a Roth. There are no penalties to do so but the amount of conversion will be taxable event. You are correct - the custodian will issue a 1099 to you reporting that as an income to you in the year of conversion.

    After you complete those two steps above you will be able to do a transfer of your Roth IRA into Self-directed Roth IRA.

    4Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Nathan Yee

    There are some new rules with Roth conversions in the new tax bill. "Do Overs" most likely will be eliminated I.e. No recharacterizations will be allowed.  

    Dependent on your specific income and tax brackets it may be advantageous to do conversions this year or possibly better next year. Review with your accountant if time allows. 

    [email protected]215-283-2868
    1Reply
  • Nathan Yee
    OP
    Porter Ranch, CA · Member since 2015 · 51 posts · 13 votes
    8y

    @Justin Windham, @Dmitriy Fomichenko, @Carl Fischer

    Gentlemen, I appreciate your thoughtful responses!

    1Reply
  • Jon RusnakPro Member
    CPA · Palos Heights, IL · Member since 2015 · 52 posts · 17 votes
    5y

    @Nathan Yee did you end up converting the 401k to a traditional IRA and then to a Roth IRA? I'm currently contemplating doing the same and was curious to see how this turned out for you.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    5y

    @Jon Rusnak

    You'll be better off transferring to Solo 401k (which has an option to have a separate Roth sub-account), then converting to Roth. As self-employed you will qualify for the Solo 401k, it has several major advantages over IRA.

    1Reply
  • Jon RusnakPro Member
    CPA · Palos Heights, IL · Member since 2015 · 52 posts · 17 votes
    5y

    @Dmitriy Fomichenko

    Thanks for your quick reply and for linking the article. I’ll definitely consider this but I have a feeling that my activity as a real estate agent may be viewed by the IRS as a hobby rather than a business. If I understand correctly, this would mean that I am not eligible for a solo 401k however my wife would be eligible so maybe we can take some action.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    5y

    @Jon Rusnak

    Do you earn commissions, pay SE taxes and show profit?

    0Reply
  • Jon RusnakPro Member
    CPA · Palos Heights, IL · Member since 2015 · 52 posts · 17 votes
    5y

    @Dmitriy Fomichenko

    My wife and I had a baby at the end of the year so I haven’t had a chance to close my books just yet but I don’t think I’ll show profit for 2020. I was not able to devote as much time in 2020 as compared to years past so tax treatment isn’t as clear at the moment and I still need to research and document my position accordingly.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    5y

    @Jon Rusnak,

    The 2020 is really irrelevant here, what about 2021? If you expect to show some profit - you are eligible.

    1Reply
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