Florida Central Gulf Coast · Member since 2018 · 31 posts · 9 votes
So, I've been searching for how I get my current investments into a Solo 401k. After doing some digging I found that I cannot roll my current ROTH into a solo 401k. I believe I can roll it into a traditional IRA which should then allow me to roll it into a solo 401k. This is rather maddening as every single search comes up with the opposite i.e. traditional IRA to ROTH! Even when the headline says ROTH to Traditional when you start to read the article it is the other way around!
Where do I find info on doing what I want to do and, is it even possible to do this? I have money tied up in a ROTH that would be better served in 1031 exchanges. I have searched on the IRS website but, typical government entity, I can't quite find what I am looking for. Any recommendations on where to find the info would be appreciated.
You cannot convert a Roth IRA to a Traditional IRA. Simple as that.
A Solo 401(k) cannot accept Roth IRA funds inbound as a rollover.
What you need to explore is a Roth self-directed IRA LLC. This platform provides the same level of investment flexibility as the Solo 401(k).
You do not need to do 1031 exchanges in a Roth IRA. There is no taxable gain to the IRA when it sells a property, and no formal exchange is therefore needed. You simply make another investment.
Florida Central Gulf Coast · Member since 2018 · 31 posts · 9 votes
7y
Brian, simply put, I don't need it in a ROTH and I can't use it for a 1031 exchange in a ROTH. I have my military retirement along with VA disability so this money is better served investing in 1031 options. I want to convert it to a traditional IRA then over to a solo 401k. I can't convert a ROTH to a solo 401k per the rules but I don't see anything that says I can't take a couple extra steps to get it where I want it.
Accountant · Tulsa, OK · Member since 2018 · 312 posts · 349 votes
7y
@Stephen Aki Pretty sure you can't roll a Roth to a Traditional. The issue is taxes, a Roth is a retirement account that has already had taxes taken out of the money deposited, so when you withdraw it you don't owe any additional taxes (unless you make an early withdrawal and owe a tax penalty). A Traditional is a retirement account that is pre-tax, and you owe taxes on the money at the time you withdraw it. I double checked the IRS website and it clearly states a Roth can only be rolled into a Roth IRA:
You cannot convert a Roth IRA to a Traditional IRA. Simple as that.
A Solo 401(k) cannot accept Roth IRA funds inbound as a rollover.
What you need to explore is a Roth self-directed IRA LLC. This platform provides the same level of investment flexibility as the Solo 401(k).
You do not need to do 1031 exchanges in a Roth IRA. There is no taxable gain to the IRA when it sells a property, and no formal exchange is therefore needed. You simply make another investment.
Florida Central Gulf Coast · Member since 2018 · 31 posts · 9 votes
7y
Hmm, so, maybe it would be better for me to just cash out the ROTH to get the working capital I need. I will have to do a bit more research, thanks for the insight.
There is no way to move Roth IRA (which is post tax) into Traditional IRA (which is pre-tax). However Roth IRA can be self-directed so you can invest it into alternative assets, all gains and income from those investments would be tax-free. It is unclear from your post what your goals are but self-directed Roth IRA can be very powerful tool to help you reach your financial goals.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
7y
@Stephen Aki I ran into almost the EXACT same problem as you a few years ago. Most of my assets were in IRAs, mostly ROTH and some Traditional, and just a small part in 'cash'. I too wanted to put my funds to work. I soon learned about the same bottleneck with the ROTH.
So I started by moving about half of my ROTH IRA funds to SDIRA that was a ROTH and then I could invest 100% of that into real estate. I then rolled my Traditional IRA into a Traditional SOLO401K (which can THEN be 'rolled within the SOLO plan to a ROTH component). both of these types of plans can also borrow non-recourse loans at about 50-60% LTV to further leverage if desired.
One 'work around' IF you have a lot of basis (contributions) in your ROTH is that *that portion* (contribution) CAN be withdrawn without tax or penalty after they are in for 5 years if memory serves me correctly. So then THAT portion that you just withdrew tax free can be contributed into a SDIRA or SOLO401 as long as you have the 'earned income'. You need to realize that you are giving up tax free income in retirement from the ROTH though in exchange for whatever benefit you see by moving it.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
7y
@Stephen Aki, I am not sure if what you are wanting to do has a benefit of moving it out of the ROTH and into a SOLO401K? What do you see as the benefit there?
With that being said, I have been thinking about taking the remaining Basis (contributions) out of my ROTH (currently in moderately aggressive index funds) to invest them in more rental housing. Yes, I have been vigorously 'chastised' here on the BP Forums for that, and probably rightly so ;-). I am getting together with my tax guy in a week or two to talk it over.
.................................................
The thought is this; In the ROTH Index funds (relatively safe and easy) I might average say 8% over the next 15 years. Lets say 50K for 15 years is 165K. That will give me about $1000 per month tax free income for 20 years at 5% return, and the I am out of money.
OR.................
Now lets say I take that 50K and take it out tax and penalty free since it is all 'basis'. I use that to buy a 4 plex for 250K (20% down) That unit cash flows about 5K per year that I will save up. It also appreciates and has loan pay-down each year - lets call that 5% of value total. After 15 years, according to BP's Rental Property Calculator
that original investment of 50K is now worth about 400K with all cash flow being held (not spent as it comes in). That 400K would be producing about 1K per month of cash flow, AND gaining about 18K per year in equity! You could sell at that point and use that 400K @ 5% to make about $2600 per month pre-tax or say $2000 after tax. OR, if held the property and had the 1K per month cash flow, that would jump up to about 3K per month 10 years into retirement when the loan is paid off. And you would still be getting about 1K per month appreciation at that point too. If you continue to hold until 20 years into retirement, your cash flow is not about $4000 per-tax or $3000 after tax (3 times what the ROTH in the market would be doing) AND you have not 'used up' your funds! You STILL have an asset worth about 600K to pass on to your heirs, or whatever your heart desires :-).
It does not *SEEM* logical to take funds out of a ROTH, *BUT* these figures sure make it look like it.
Florida Central Gulf Coast · Member since 2018 · 31 posts · 9 votes
7y
Thanks all for the input. My objective is to position my ROTH contributions so that I can use it to invest in property as a 1031 exchange. Dmitriy Fomichenko mentioned that a ROTH can be self directed, it was never tied to an employer so I am wondering how I go about executing a 1031 exchange for a property that I am currently eyeing.
When you use self-directed IRA your IRA would simply buy the property, it is not an exchange, has nothing to do with 1031.
1031 exchange is utilized when you selling property that you personally own. If you wish to defer capital gain tax on the sale, you can exchange that into another property employing this strategy.
Exchange means that you exchange one property into another property. Perhaps you are not describing your situation clearly. So far I'm only seeing one property you are considering to buy. Is there another property? Please clarify.
There are numerous benefits of contributing money to Solo 401k:
Tax deduction, this plan allows contributions up to $61,000 per year per participant. Husband/wife team can potentially lower their taxable income by over $120,000! Think about the tax savings as a result of that (this would also likely result in the lower tax bracket).
Tax-deferred growth: your investment returns are not diminished by taxes, you will be able to accumulate significantly larger amount of wealth as a result.
Self-directed plan allows alternative investments: you can invest in real estate, trust deeds, syndications, tax liens, etc. etc. inside of your Solo 401k plan.
Some plans also allow post-tax (Roth) contributions, that means you pay the taxes upfront, your investments grow tax-free and distributions are tax-free!
Once you understand the benefits and properly utilize this vehicle - you will find it to be great tool helping you build wealth.
Most participants are motivated by the tax deduction received for the funds they put into a Solo 401k. Passive investments within a Solo 401k grow either tax-deferred (for pre-tax funds) or tax-free (for Roth funds). This is usually a huge benefit compared to making the same investment outside of the Solo 401k.
Pre-tax funds are taxed as ordinary income when distributions are taken after age 59.5.
From the 'consumer' side of things I would add that you can 'borrow from' your account which you cant do with a Self Directed IRA. Another BIG one me over a SDIRA is that when borrowing money there is virtually no paperwork and no taxes due on the profits made with that borrowed money. That does NOT mean one should NOT borrow funds in a SDIRA IF that is your only option available - just that if you DO qualify for a SOLO401K, I can not imagine why a person would use a SDIRA instead.
The taxes at time of eventually withdrawing funds depends on each persons situation. I *think* if a held in a Traditional account, meaning non ROTH, those would be at your ordinary income tax rate. If in a ROTH account, there would be NO tax due.
One of the DISadvantages of using ANY kind of retirement fund, be it Traditional or ROTH, compared to just invest with the cash without investing through the retirement account, is that you need a LOT more down payment with the retirement accounts for rental properties.
Looking at my example above, with that 50K, if I just bought a place withOUT putting it in a retirement account I would be able to buy 250K or more of property since I can borrow all day long at 20% or less down and 5% interest all day long. Once I put it INTO a retirement account I now am likely to need at LEAST 40% down, so can only buy about 125K of property, or half as much.
The complicated part comes in figuring out if that outweighs the tax deferred or tax free growth of the retirement accounts.
One thing to remember is that it 'seems' like you would have to pay taxes as you go when invested outside of a retirement account, but from my experience for the first 10-12 years you *might* actually have a 'paper loss'. Meaning that with the benefit of depreciation, your taxable income from rentals remains 'negative'. During that time, you are also building equity tax deferred through appreciation and loan paydown.
Options at that point would be to refinance and buy more property or sell via a 1031 exchange and buy a larger property that will be in a 'tax free' range for about the next 10 years.
Many ways to get there, just need to find the one that fits you best.
Florida Central Gulf Coast · Member since 2018 · 31 posts · 9 votes
7y
Dmitriy, alles klar! Kinda, I understand what you are saying about the 1031 exchange now. This would be the first property so I would want to invest existing ROTH funds into this property. Later down the road, as I understand it, if I sell this property and buy another one I could execute a 1031 exchange.
Daniel, good information that is definitely helpful in understanding the nuances of this subject, thanks.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
7y
Stepehen,
IRA is tax-deferred account, when you sell property in an IRA you will not owe taxes so you don't need to utilize 1031 exchange. Simply sell the property, wait until you find another investment and reinvest.