Self-Directed Solo 401(K) Real Estate Investing

Tax, SDIRAs & Cost Segregation
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Self-Directed Solo 401(K) Real Estate Investing

Robert Chaiton
Denver, CO · Member since 2016 · 23 posts · 7 votes

Hi BiggerPockets,

I have read the book advanced tax strategies and want to take advantage of the Self directed Solo 401(K) I have a few question and was hoping the community could help me out.

Currently I have a W2 job, but I also do business consulting on the side and after reading the book I want to create a sole proprietorship in order to utilize the solo 401(k) retirement option. Once I create the sole proprietorship I want to transfer my current 401(k) from my W2 job into my self directed solo 401(k) plan. Then contribute as much as possible into the plan as an employor contribution from my sole proprietorship and match it with my earnings.

Once I have enough equity/money built up, I want to purchase a buy and hold investment property. The catch here is, I want to create a management agreement with the property which is owned by my self directed solo 401k to earn the cash flow from the property while making the net income 0 or negative. The agreement will be with my consulting company (or a new LLC/ sole proprietorship company). My questions with this are:

1. Is it possible to transfer my current W2 401(k) into a self directed solo 401(k) while contributing to receive contributions from my current employer?

2. Is it possible to create a management agreement with the property owned by my self directed solo 401(k) and my consulting/new LLC/business to earn cash flow from the property through management fees

Does it matter where my CPA is located. I live in Denver but would be open to help from a professional anywhere on this topic.

Thanks for reading!

Bobby

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
6y
Originally posted by @John Underwood:
Originally posted by @Linda Weygant:



Secondly, if you are affected by COVID, your employer/plan administrator *may* be allowing a $100,000 distribution from the plan that is penalty free.  The tax liability would then be spread out over three years.  So you may want to look and see if this is an option that is workable for you.  Talk to a knowledgeable CPA about the ins and outs of this.  @Natalie Kolodij is a rock star on this topic. 

 This brings up a question for me.

I have a traditional 401k from a previous employer. (Non Roth)

Can I pull up to 100k from it and roll it into either my self directed Roth IRA or my solo401k (Roth)?

Are either or both allowed?

I know I'd have to pay the tax.

But you said you could spread this out over 3 years?

I'm honestly still getting up to speed on this new rule, but I know that Natalie knows this inside and out, so hopefully she'll come and answer this when she sees it.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y

    First will your current 401k allow a transfer? Many do not while you are still at the company.

    second not sure if you can, someone will  answer this I'm sure.

    Third. No to your #2. That would be self dealing and is not allowed.

    Don't think it matters where your CPA is located. No filings required until you reach 250k in assets.

    I created one of these and use the ROTH component. I took the tax hit now, but will not pay tax on the gains when I start pulling money out as long as I don't use any borrowed money.

    1Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    6y

    As @John Underwood mentions, your current employer may not allow you to do an In-Service withdrawal of the plan, so that would be the first thing to check.

    Secondly, if you are affected by COVID, your employer/plan administrator *may* be allowing a $100,000 distribution from the plan that is penalty free.  The tax liability would then be spread out over three years.  So you may want to look and see if this is an option that is workable for you.  Talk to a knowledgeable CPA about the ins and outs of this.  @Natalie Kolodij is a rock star on this topic.  If your employer plan isn't allowing it, look at any other IRAs you have and see if taking a distribution is workable.

    Third, be careful you aren't shooting yourself in the foot with this plan.  If you're contributing to your current employer's 401k plan - and they are matching those contributions - you'll be losing out on the compounded value of that free money.  You'll want to build that loss into whatever investment you buy and see if you're able to make up that loss with your investment.

    You may be better off continuing to contribute to your employer's plan and waiting until you have "enough" later, rather than pulling it out now.  If you're not already maxing out your employer plans' contribution, do that first.

    If you really do think you can contribute more to your own plan, then this may be workable, but generally you're not going to get there until your side hustle is bringing in more than $20,000/year.  That's a tough goal to meet in addition to a full time job.

    To answer your direct questions:

    1. Is it possible to transfer my current W2 401(k) into a self directed solo 401(k) while contributing to receive contributions from my current employer?

    Only if the employer plan allows it.  

    2. Is it possible to create a management agreement with the property owned by my self directed solo 401(k) and my consulting/new LLC/business to earn cash flow from the property through management fees

    Absolutely not.  In no way, shape or form are you permitted to personally benefit from a transaction with your 401(k).  Doing so can invalidate the account and cause the entire plan balance to be considered as distributed to you when the prohibited transaction occurs.

    Podcast Guest on Show #244
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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y
    Originally posted by @Linda Weygant:



    Secondly, if you are affected by COVID, your employer/plan administrator *may* be allowing a $100,000 distribution from the plan that is penalty free.  The tax liability would then be spread out over three years.  So you may want to look and see if this is an option that is workable for you.  Talk to a knowledgeable CPA about the ins and outs of this.  @Natalie Kolodij is a rock star on this topic. 

     This brings up a question for me.

    I have a traditional 401k from a previous employer. (Non Roth)

    Can I pull up to 100k from it and roll it into either my self directed Roth IRA or my solo401k (Roth)?

    Are either or both allowed?

    I know I'd have to pay the tax.

    But you said you could spread this out over 3 years?

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    6y
    Originally posted by @John Underwood:
    Originally posted by @Linda Weygant:



    Secondly, if you are affected by COVID, your employer/plan administrator *may* be allowing a $100,000 distribution from the plan that is penalty free.  The tax liability would then be spread out over three years.  So you may want to look and see if this is an option that is workable for you.  Talk to a knowledgeable CPA about the ins and outs of this.  @Natalie Kolodij is a rock star on this topic. 

     This brings up a question for me.

    I have a traditional 401k from a previous employer. (Non Roth)

    Can I pull up to 100k from it and roll it into either my self directed Roth IRA or my solo401k (Roth)?

    Are either or both allowed?

    I know I'd have to pay the tax.

    But you said you could spread this out over 3 years?

    I'm honestly still getting up to speed on this new rule, but I know that Natalie knows this inside and out, so hopefully she'll come and answer this when she sees it.

    Podcast Guest on Show #244
    1Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @John Underwood

    In order to take a Coronavirus Related Distribution, you must show an impact by the pandemic.  This can include being diagnosed, having a family member diagnosed, having reduced work hours, etc.  

    If so, you can take a distribution of up to $100K and the taxes can be spread out over 3 years.  You also have the option to replace the funds back into a qualified retirement plan during that same 3 year window and can amend any filed tax returns to reclaim taxes paid on the distribution.  

    This can be a way to liberate funds from a current employer 401(k).

    If, however, you want to also convert tax deferred funds to Roth status, you will need to redeposit the funds this year and pay the taxes on the conversion this year.

    Note this is a likely allowable but not entirely above the board transaction.  To claim the hardship based on Coronavirus when you are actually in a position to pony up the extra taxes for the conversion is disingenuous at best and certainly outside the intention of the law, but there is not at this time anything saying you cannot do this.  

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y
    Originally posted by @Brian Eastman:

    @John Underwood

    In order to take a Coronavirus Related Distribution, you must show an impact by the pandemic.  This can include being diagnosed, having a family member diagnosed, having reduced work hours, etc.  

    If so, you can take a distribution of up to $100K and the taxes can be spread out over 3 years.  You also have the option to replace the funds back into a qualified retirement plan during that same 3 year window and can amend any filed tax returns to reclaim taxes paid on the distribution.  

    This can be a way to liberate funds from a current employer 401(k).

    If, however, you want to also convert tax deferred funds to Roth status, you will need to redeposit the funds this year and pay the taxes on the conversion this year.

    Note this is a likely allowable but not entirely above the board transaction.  To claim the hardship based on Coronavirus when you are actually in a position to pony up the extra taxes for the conversion is disingenuous at best and certainly outside the intention of the law, but there is not at this time anything saying you cannot do this.  

    Thanks!, good points. I don't want to do anything sketchy and had not thought of it this way.

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @John Underwood

    To be clear, if there is a legitimate Coronavirus impact, using this method to liberate the funds from a current employer plan to effectively "rollover" funds is not a concern.  

    The Roth conversion in the same year seems aggressive.  It could be a matter worth discussing with your licensed tax advisor.

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y
    Originally posted by @Brian Eastman:

    @John Underwood

    To be clear, if there is a legitimate Coronavirus impact, using this method to liberate the funds from a current employer plan to effectively "rollover" funds is not a concern.  

    The Roth conversion in the same year seems aggressive.  It could be a matter worth discussing with your licensed tax advisor.

     Can you wait till the next year to rollover funds or put 100k into a solo 401k that you took out of a employer 401k from a previous year?

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @John Underwood  Work with your CPA to gain an understanding of a Coronavirus Related Distribution and how it works.

    You do have a 3 year window to work with and can place funds distributed from a plan into any other compatible plan.  If you replace funds after 12/31/20, you will need to pay at least 1/3 of the taxes owed on your 2020 return.  You would then in 2021 or some other future year when you place funds into another plan need to go back and amend your 2020 return to get a refund of the taxes paid.

    The key here is that if it is your intention to rollover, do it before December of this year, or at least in year one.  Having to go back and amend up to 3 tax returns could be an expensive task.

    Doing a rollover initiated via a CRD is not an issue, so long as the qualifying impact of corona virus can be documented.  Waiting a few years to do a Roth conversion may or may not be necessary/recommended, but you would certainly be able to do that.  Again, my concern on a CRD+Roth Conversion is entirely one of the intent of the CARES act.  There is nothing in writing that says you cannot do that.

    0Reply
  • Account Closed
    Investor · Vancouver, WA · Member since 2013 · 315 posts · 63 votes
    6y

    @Robert Chaiton

    Robert - Self-directed is the way to go for sure.  I've been doing if for a bit but why would you put the most your most tax efficient investment known in a tax sheltered instrument?  I prefer to invest in 2nd position notes on flips.  You so your own underwriting and your principal is secured by the property.

    0Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y

    @Account Closed I hear that question a lot of 'why rentals' in a Self Directed Account.

    For me at least, and I am sure a lot of others too, it was/is because *that* is where most of my assets *already were*. I did not have much 'cash' available to invest with, but I *did* have enough in my retirement accounts to buy or put down payments on 8 units. In cash I only had enough for two units and did that also with some creative financing.


    So I looked it as "how can I make these funds in my Self Directed Accounts make the *best return", and preferably in something I understand". In *my case*, that was CLEARLY in rentals over Notes, Stocks, etc..... So I looked at it as *even though* I dont get the exact same tax favoritism of of traditional 'cash rentals', it *still* give me the best return *even without* with tax benefits.

    Hope that makes sense for those reading to understand why *sometimes* it is still a good choice, depending on your goals.

    [email protected]608-524-4899
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