Coverting my Roth IRA and or 401K to Self-Directed?

Question

Hi BP,

I’m considering converting My Roth IRA and 401k retirement accounts to self-directed so I can invest in real estate. However, I’m still employed and read that I’ll need to open a IRA LLC in order to invest. Would I still reap the tax benefits with a self directed IRA?

The custodian on all my accounts is through fidelity.  Thanks,

Armand

Brian Eastman · Answer

@Armand P.

Either an IRA or Solo 401(k) can be self-directed and invested into real estate (and much more).

Only someone who is self-employed with no full time employees can establish a Solo 401(k).  Further, a Roth IRA may not be rolled over into a Solo 401(k).  So, based on the limited information you have provided, a Checkbook IRA would likely best suit your situation.

A Roth self-directed IRA will still receive income from investments tax-free, just as a Roth IRA in the stock market does.  You are not changing the IRA from a tax perspective, just the choices it has for investments.

Several quality providers of Checkbook IRA plans are active here on BP.  Give one or more of us a call and learn more about your options.

Dmitriy Fomichenko · Answer

@Armand P.

You can convert your Roth IRA to self-directed IRA (you can use custodial SD IRA or "checkbook" type).

If you have a 401k with the current employer - you are likely will not be able to access those funds while you employed there. Call your 401k plan administrator and ask about "in-service distribution". But like I said the answer is likely going to be no.

Also you won't be able to combine Roth and pre-tax funds into the same IRA, you will need to separate accounts, unless you want to perform a Roth conversion, which would be taxable event.

George Blower · Answer

@Armand P.

Here are some issues to consider in choosing an Self-directed IRA provider:

1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.

2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.

3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.

In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.

Justin Windham · Answer

@Armand P.

There are still tremendous benefits to be had with a self-directed IRA. An IRA LLC, while not required, can provide even more control and ease of investing compared to an IRA that is controlled at the custodial level.

As far as the Solo 401k is concerned, note that you can still be employed and have a Solo 401k as long as you also have self-employment activity. Being employed does not necessarily make you ineligible. Depending on your Roth IRA asset value and any other accounts you may have, you might choose the IRA over the Solo 401k even if you are eligible. Some clients have both.

Once you determine which account is right for you, your new provider can help you transfer the assets from Fidelity to the new account with much more capability.

Taylor L. · Answer

Whatever you do, be aware of the requirements placed on you. Find a CPA who is competent in these matters before you make an investment, or at least have options and a plan. Ask your custodian how they will support you with matters like UBIT (all custodians are not the same on this!)

Juan Deshon · Answer

Hi Armand, there are various strategies when using a self directed IRA. You do not need to open an IRA LLC in order to invest. Many custodians act as the "arm" in the transaction by holding your funds eliminating the need for an LLC. Having an IRA LLC in some cases may prove highly beneficial on the other hand. I would suggest speaking to multiple custodians and getting a feel for the process on how your specific investment would take place. Go with the most cost effective and efficient custodian for you!

Coverting my Roth IRA and or 401K to Self-Directed?

Most Popular Reply