Rental Property Investor · New Albany, IN · Member since 2019 · 3 posts · 1 vote
Need an experts advise here...I have recently left a W2 income and began working as a Sole Proprietor. I had a 401K (25K) and ESOP (75K) (Employee Stock Ownership Plan) through my previous employment. The ESOP is being held in a Money Market account until 5 years after my employment was terminated and the 401k is currently available to be rolled over ect...
My question is...is there a way to access these funds without being taxed out the wazzoo? My financial advisor has recommended a self managed IRA...I would like to avoid this as I understand there is a considerable amount of hassle to satisfy the requirements. Ideally, I would love to be able to pull out this cash to use to invest in RE as I would be able to control my return much more than I'm able to now. Any thoughts or suggestions are very appreciated.
You can roll the 401(k) into an IRA (that either you or your advisor manage). Otherwise you will be subject to income taxes and a 10% penalty. After the 5 year period the ESOP can be rolled into the IRA as well.
To get the funds out without paying the 10% you will need to convert the IRA to a Roth and wait 5 years. After 5 years from the conversion the amount you converted is considered "Basis" and can be withdrawn for any reason without tax or penalties. This is considered taxable income so you do get taxed, but you avoid the 10% penalty. You just have to make sure the conversion doesn't bump you into a higher tax bracket. Have your advisor or accountant do a tax projection for this... For a lot of people it makes sense to do partial Roth conversions on an annual basis to fill up their 12% tax bracket.
The other option is to start a 401(k) (Solo (k) if you don't have employees), roll the money into it and then take loans of up the lesser of 50% of the account value or $50,000. So, if you roll all $100k into your 401(k) you can take out a $50,000 loan from the plan.
If you're are charitable, you can make a larger charitable gift (to a qualified charity or Donor Advised Fund) in the same year you do a Roth conversion to cancel out some of the tax burden or just keep you in a lower bracket. Note that this only works if you're in a position to itemize with the larger gift.
Is any of your 401(k) money Roth 401(k) or is it all Pre-Tax?
Does that help?
Obviously I don't know your situation so none of this should be done without the agreement of your financial advisor or CPA.
Rental Property Investor · New Albany, IN · Member since 2019 · 3 posts · 1 vote
6y
Thanks @Scott Jensen! Great insight! Yes, it is all pre tax unfortunately.
Interesting! I have never heard of the Roth conversion (taxed), wait 5 years, pull penalty free. If you know where I can read up on that i would be interested in reading.
One of the things that makes Roth IRAs so great, in my opinion, is that you have access to a lot of the funds before 59 1/2 because you can withdraw the basis at any time. Note that distributions from Roth 401(k)s work differently and aren't nearly as accessible without paying taxes and penalties.