Roth IRA conversion or rollover to a solo 401k. Is there a way ?

19 Replies

Hello BP Community ! 

I live in Phoenix AZ and in my quest to choose the best self managed retirement account (for me), that I can fill with a few hand picked investments from the NYSE to grow my wealth for retirement with diversity. I have found that I want a Roth IRA and believe Fidelity may be the best option to suit my needs in the meantime. Moving forward down the road perhaps a few years or so I will want the flexibility of something self directed. Perhaps with larger contribution limits and no limit on income so I can incorporate real estate investments into the mix ( Understanding I will no doubt have to move my money from Fidelity to a brokerage specializing in real estate and self direction). That's when through shuffling around on BP I was introduced to the idea of a solo 401k as a potential option to roll or convert my prospect Roth IRA account into. But soon discovered a Roth IRA cannot be rolled directly into a Solo 401k but a traditional IRA can. I understand I don't qualify for a Solo 401k at this point in time due to me not being self employed yet.

My questions are as follows

* Am I allowed to convert a Roth IRA into a traditional then roll that into a Solo 401k?

* Would it even be worth it? 

* And if this way is a no go is there another way I don't know of yet?

  Any additional information on the subject is of course greatly appreciated, thank you all in advance for your time!

      HI @Daniel Gerardi ! I want to zoom out and ask a fundamental question here: why would you want to convert a Roth IRA to anything? You could transfer your Roth IRA from Fidelity or whichever investing house you have it at to a Self-Directed IRA account (like Equity Trust, Millennium Trust and Capital, etc) and use this SD Roth IRA account to invest in . . . darn near anything!

      Then, as you gain the ability to contribute to a Solo 401k account you can do so at a Self Directed Solo 401k place (like the same place you have your SD Roth IRA account) and you can use the SD Solo 401k alongside your SD Roth IRA account to purchase a broad spectrum of investments.

      Occam's Razor leads me to conclude that you should not transfer money from a Roth IRA here.

      @Daniel Gerardi

      You can not rollover a ROTH IRA to an IRA.

      You can not rollover a ROTH IRA to a ROTH 401k.

      You can convert an IRA to a ROTH IRA.

      You can convert a 401k to a ROTH 401k (if available in you sponsor plan).

      You can rollover a 401k to an IRA or an IRA to a 401k.

      You can rollover a ROTH 401k to a ROTH IRA.

      Usually the ROTH solo 401k is better than a ROTH IRA when you invest with leverage as it is not subject to UDFI taxes.

      However, while in retirement often people rollover their ROTH 401k to a ROTH IRA as it is not subject to Required Minimum Distribution.

      I have wrestled with the exact same questions! When I discovered Self Directed Accounts at least 80% of my existing retirement funds were already in ROTH IRA, the balance in Traditional IRA.

      So I rolled the Traditional over to a SOLO401K to avoid the UDFI taxes mentioned above when leveraging, and the ROTH to a SD ROTH IRA. I have so far chosen NOT to leverage the SD ROTH IRA.

      I have also looked at withdrawing the ROTH *contributions*, which would be penalty and tax free, and then *contributing* those funds to my SOLO401K, and doing a ROTH Conversion once in there. I do NOT see a downside to this, but need to look into it more.

      To the Pros out there, am I missing something in thinking it would work to take the *contribution* from my ROTH IRA out, tax and penalty free, and use that 'cash' to make a large contribution to my SOLO401K? Note that I do NOT make large contributions right now, so I would not 'be using up that years contribution'

      Thanks, Dan Dietz

      Originally posted by @Daniel Dietz :

      I have also looked at withdrawing the ROTH *contributions*, which would be penalty and tax free, and then *contributing* those funds to my SOLO401K, and doing a ROTH Conversion once in there. I do NOT see a downside to this, but need to look into it more.

      You can not contribute to a solo 401k unless it is coming from earned income from the business that is sponsoring your solo 401k.

      Once the money is in the ROTH IRA there is no really tax advantaged way of moving it somewhere else unless you want to spend it.

      With what you are describing, I would not withdraw the ROTH contributions.

      I was wondering if the CARES Act withdrawal rules would maybe create a backdoor to rollover a ROTH IRA into a ROTH solo 401k, but it is a stretch of the way the Act is written and until we get a clear ruling how to apply the Act I am keeping my eyes on it to see how it evolves.

      The Roth IRA restrictions mentioned by @Mike S. are true. The Roth IRA is a dead end road in that those funds cannot be transferred or converted to other retirement account types. While it would be nice to be able to move the Roth IRA assets to a Roth Solo 401k, it just isn't allowed. A self-directed Roth IRA LLC is the highest level of control and flexibility one can have with a Roth IRA. We have many clients with both Roth IRA LLCs and Solo 401ks because of this.

      It would be very interesting if these "unprecedented times" also created an unprecedented backdoor way to accomplish this temporarily.

      @Daniel Dietz

      Have you done the UBIT/UDFI calculations on leveraged property? In most cases I’ve seen there is little to no tax on the Ira. Many people and CPAs aren’t sure how to figure the taxes with the exemptions and make a big deal about it.

      Many others are on the right track with their comments above, but to help summarize and provide some direction Daniel: 

      1) You are permitted to roll tax-deferred (Traditional IRA) funds into the tax-deferred portion of the Solo 401k. Assuming the plan document permits it, you can then perform an in-plan conversion, converting the funds to the Roth component of the plan.
      2) Back to your specific case, sounds like you have a Roth IRA, so therefore makes more sense to simply establish a self-directed Roth IRA with a custodian that permits real estate holdings. 
      3) If you eventually claim active earned income through your business (income you pay income taxes on and payroll taxes - Medicare and Social Security) then you can look into a solo 401k at that time. You can contribute to both the Roth IRA and solo 401k. You may need to back door your way into the Roth IRA if you are a high income earner through a traditional IRA. With a soloK there are no income limits for a contribution to the Roth component. 
      4) Great point above on the UDFI leveraged real estate exemptions. 

      All said Daniel, the account type you select is dependent on your specific needs and goals. I like to start by understanding what types of deals are you looking to do and do you have enough funds available in the Roth to finance the entire project, or will we need to examine potentially partnering with other IRAs, whether family members, your personal funds or non family members. For example, I funded a 43,000 loan last year partnering my Roth and Traditional 50/50. Another deal, bought a 63k rental 55% Roth, 35%Trad and 10% personally. 

      Lastly, if you have a skill set in finding deals, and money partners, you can look at creating a JV, assuming with non-disqualified persons (non family members). For example, 100k purchase and rehab, sell for 140k, make 30k in profit. You put in 5k Roth IRA and investor partner puts in 95k. When you sell, per your JV you split 50/50, your Roth makes 15k and your investor partner makes 15k! Get with a good real estate attorney.

      Hope this helps for now to give you some ideas! 

      Hi @Will Fraser thank you for you input on the subject!

      After some thought on your question as to why I would want to convert my Roth IRA to anything. I like options, while I may not need or use every option at my disposal I feel it's a good idea to know of and have them. Since I don't know 100% what my future needs or wants will be, knowing what ones I have and how I can use them to my advantage holds some value for me. In this particular case with rolling or transfering funds from a Roth IRA to some other retirement account type like a Solo 401k with a whole other set of options for me to take advantage of. This could in my eyes provide me with fluidity (how easily I can move my various funds and investments around within my overall portfolio) so I can have a large variety of things I can do with the same funds instead of them being locked into one location indefinitely. Should I ever need to get creative with how I fund future (which I no doubt will) i'll have some options. That's my thinking at this point in time.

      It's not an end all be all decision maker for me to open a Roth IRA account with fidelity just knowing what i'm getting myself and my money into haha. I really like your point about just keeping it simple and rolling a Roth IRA into a true Self Directed Roth IRA and starting a Solo 401k when I can start one. And one that I will seriously consider moving forward.

      Thank you Will !      

      @Mike S. Thank you for highlighting some cans and cannots for me as well as limitations on how to contribute funds to a Solo 401k. Those will definitely come in handy to know. @Justin Windham I appreciate you jumping in and backing up what Mike S. says with some of your own personal experience, it bodes well with my inner sceptic haha. Could you please clarify for me a little bit what a Self Directed IRA LLC is ? I believe that's commonly referred to as having checkbook control ? And if you could provide any further useful information on Self Directed IRA LLC's like limitations, rules, tax advantages etc.

      Thank you both so much for your input here!


      @Mike S. I understand what you are saving about 'income earned from your business'.

      Why this would work, at least in my case and many others too is this.... say I earn 40K at my business, and dont have any funds left to make a yearly contribution this year. Now lets also assume that I take 20K from the contributions/basis of my EXISTING ROTH IRA out. I now have 60K to work with for the year and am able to make a 20K contribution to my SOLO401K/ROTH. Similar would be if I got a 20K inheritence in addtions to my 40K income for the year.

      When that would NOT work is if I made say 10K from my business. Now even if I got an extra 20K from another source, I could not put more than the 10K of 'earned income' from the busienss in for that year.

      Hope that makes sense

      @Carl Fischer I have taken a very rough look at that, and agree that it can be VERY small is anything.

      More the reason is because I *already have* a SOLO401K that I own property in, and between that account AND my ROTH SDIRA I have a large amount of reserves and equity in the properties in the ROTH SDIRA that I can tap into. It seems like I could more easily accomplish my goals of buy larger properties by *combining* the equity of the two accounts into one, and that the SOLO401 would make the most sense. Think of it in terms if I have 50K in each account and found a property that I need 100K down for it would be easier to do that with just one entity it seems.

      I also thought about looking at having those accounts 'partner' with each other. There seems to be a lot of disagreement if that is a good idea or not due to a person's accounts being 'disqualified to each other'. I had been in a similar deal with a disqualified person, and even when following the rules there seems to be a LOT of limits on it. Such as not being able to add more contributions to buy more properties.

      So with all of that in mind, just taking the contributions from my ROTH IRA penalty and tax free to my understanding, and making large contributions INTO my SOLO401K over the next couple of years (that I do NOT anticipate I would have excessive income to do other wise) seems to be the most logical choice.

      But I very could be wrong too ;-)

      Dan Dietz

      @Daniel Dietz - you thought it out-it works for you. It makes sense-Stay with it-

      I would keep a Roth IRA for future transfers -so I don't have to take RMDs. The Roth 401k has RMDS when you reach 72 yo. May or may not be a concern for you.

      Thank you for reviewing your UBIT numbers and reporting back.

      @Daniel Dietz Thanks for being apart of the discussion!

      I'm glad there is someone out there with the same questions about this as me. I have considered the use of Roth IRA contributions in the past but not with the idea of depositing it into another retirement account. It's a clever idea and one I hope can be put into action. In your experience have you known anyone to pull off the idea of withdrawing the contributions from a Roth IRA and depositing them into a Solo 401k? Wouldn't this imply that the rules governing where the contributions come from are somewhat flexible on origin, especially if the business spent all of its earnings that year?

      @Daniel Gerardi I HAVE taken ROTH Contributions for just buying property and NOT put in back into another account such as the SOLO401K. My reasoning that time was to get the leverage ability of a traditional loan with low down payment..... meaning I could get into a a 100K rental for 20K down instead of the 40K needed for non recourse loan - essentially doubling my buying power. There IS the issue that at some point when depreciation runs out that income will NOT be 'tax free' anymore like IN a ROTH, but I plan to definetly do at least some 1031s so that was not a big issue to *me*, although might be for others.

      The method of taking from ROTH IRA Contributions and putting them into my SOLO401K ROTH is new to me, but from what I am learning running numbers and looking at pros/cons I expect that I will do it in the next year when the right deal comes along.

      An example is one I am slowly working on (cold called a landlord that I heard wants to retire soon) is a package of 3 properties for about 700K. He is willing to Seller Finance for about 100K down. I dont have that much is EITHER my ROTH IRA or SOLO401K, but *if* if took the reserves in my ROTH which owns two rentals, and is LESS than the Basis in that account, and put that into my SOLO401K ROTH I *would* have enough. And to *me* that seems more logical that doing a 'joint venture' between the two accounts.

      @John Bowens You have certainly given me some more strategies and things to keep in mind. Being able to partner my 401k with my IRA sounds like a useful tool " The juices are flowing !". It's really interesting what you guys are saying about UBIT/UDFI not being as bad as everyone claims. Especially since it's only a matter of time for me when I will start using leverage. When the time comes i'll make it a point to look into it more and not flee in the other direction so to speak. Thank you !

      @Daniel Gerardi

      To answer your question, an IRA LLC is a structure consisting of a self-directed IRA which invests into a LLC to provide checkbook control (usually) to the IRA account holder. Without the LLC, transactions are handled via the IRA custodian. As the LLC manager, the IRA account holder can control the IRA assets that were used to fund the LLC. The primary restrictions to keep in mind are disallowed assets (such as collectibles) and prohibited transactions, such as self-dealing. The tax advantages depend on whether you have a traditional or Roth IRA. Traditional IRAs provide tax deductions when contributions are made and they allow assets to grow tax-deferred. Roth IRAs do not provide a tax deduction for the contributions, but the assets grow tax-free (they are not taxed as the assets grow or when you take qualified distributions).

      There's quite a bit of info on this topic spread throughout the forums. You can also learn a lot by reaching out to one or more of the providers that post here regularly.

      @Justin Windham  

      I thought that's what that was, I think it would only be natural to aim for an IRA LLC when the time comes. Especially since I have no interest in collectibles for a retirement account and the added control can be a ++. Bigger Pockets has been an invaluable resource for me thus far and I will be looking more into using IRA's and 401k's with the help of Bigger Pockets and it's major contributers in this area.

      Thank you Justin!  

      @Daniel Dietz So you will be putting that strategy into action shortly, I would love to hear how it goes when you do. So i'll just fallow you on BP and hope you update us haha ! In your situation why do you find depositing Roth IRA contributions to your 401k more logical than a joint venture between the 2? I have some ideas as to why but i'm curious what you think.

      @Daniel Gerardi ,

      I guess there are two reasons, but I still need to confirm my thoughts on both with my LLC lawyer and Plan Provider.

      The first is that when you go into a venture with ANY disqualified person/entity, which my understanding that it is when you 'partner with yourself' as well as the previous one I was in with another disqualified person, there are a LOT of restrictions and laws to watch.

      From my recollection before we disbanded that partnership a few of the limitations were things like; once we made our initial contributions for our first purchase, we were not allowed to make ANY more contributions to buy more properties, or even if capital improvements were needed. We also could not ever buy or sell shares or 'change percent ownership' from how it started. Basically 'one and done' which we were not at ALL aware of when we started.

      A couple good resources on Youtube to learn more are Mark Kohler, Clint Koons, George Blower and Mat Sorenson.

      I guess the other things is that I dont see any reason NOT too, at last up to the amount of contribution/basis where there is NO penalty or tax. I would feel different if I had to eat up part of that with taxes or penalties. I have a large amount of basis as I have contributed for about 20 years.

      I would love to hear if anyone has a reason NOT to do it. I just don't see any at this point.

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