Self directed 401k prohibited transaction?

Question

So, I was thinking of moving my W-2 401k to a self directed 401k. I understand that all profits have to be returned to the 401k, and there is a rule that a payment can not directly benefit you. This is my question... This is MY 401k. The properties that MY 401k has will need managed. (Tenants found, maintenance upkeep, etc) I will need to pay a management company, and it will be an expense out of the income to the 401k. What if MY Wife just so happens to own the management company? Her name isn't tied to my 401k, and I'll have to pay some management company, so why not hers? Is this considered a prohibited transaction? Thanks BP

Dmitriy Fomichenko · Answer

@Daniel DietzYes, you can have an W-2 income even with an employer's 401k, and still have a Solo 401k. You are right that the contribution to your Solo 401k is limited to income from your self-employment job. You are right that you can withdraw the contributions from the Roth IRA, but once you withdraw it, the money cannot be contributed to another retirement account. Contributions made to a retirement account are limited to your earnings only. In the case of a Solo 401k, you can only make contributions from your self employed income.

Rajeev Kotyan · Answer

@Daniel Dietz: (1) The 5 year limitation for ROTH IRA to withdraw your principal does not count as earned income, and you can only contribute earned income into a SoloK (including the ROTH bucket).(2) The 5K from self-employment income, you can contribute all of that into the employee bucket of your Solok, only provided you have not exceeded the limit of employee bucket contributions within your W-2 job. That is the employee bucket is limited to $18K ($24K if you are 50+) across all your 401K plans at all employers including self employed.@Neil Henderson: Yes you can, so long as the SEP IRA has been fully vested (i.e. check with your employer as to your vesting period)

Neil Henderson · Answer

Is it possible to convert part of a SEP-IRA from a current employer into a self-directed 401K?

Justin Windham · Answer

@Daniel DietzCorrect, you can have W2 income from employment and still have a Solo 401k as long as you have self-employment as well and no full time employees.There are no limits on amounts rolled over into the Solo 401k, but there are contribution limits. Yes, your contributions to the Solo 401k will be limited to your earnings from self-employment (and even less at amounts over $18,000 or $24,000 if over 50). This is because after that 18k or 24k in employee deferrals, your profit sharing contributions will be limited to a percentage of income.

Daniel Dietz · Answer

Just to clarify a couple of questions as I am thinking about transferring some of my Traditional IRA into a 401K, along with the ROTH - SDIRA I already have.I believe you can have 'W-2 Income' AND also be Self Employed and still have a Solo401K, correct?Is it right that a person could transfer or roll -over any amount into a Solo401K, but 'direct yearly contributions' are limited to the amount you make at your Self Employment? Meaning if I make 100K at my W2 Job, but only 5K Net Profit at my Self Employment Job, I would be limited to the 5K for a yearly contribution? I like the idea of the simplicity of the of the Solo 401K (or ROTH Solo 4o1K) as far as borrowing/interest rules are concerned. I understand that I can not 'roll-over' from a ROTH IRA to a Solo401K plan due to IRS rules (I dont understand the 'WHY' of it though). Would the following at all be a legal way to work around that?Say I have either a ROTH IRA or a Self Directed ROTH IRA with a value of 300K, of which 100K is Principal Contributions. My understanding is that after the '5 year look back' (not sure if that is the right name) I can withdraw the Contributions ONLY, not the Earnings (so the 100K mentioned above and leaving the 200K Earnings in the ROTH)I could then use the withdrawn contributions to fund either a Solo401K or ROTH Solo401K.Obviously this would need to be done over a number of years to stay in within the yearly contribution limits.Thoughts? Thanks, Dan Dietz

Steve Jeffries · Answer

Brian Eastman Chris Soignier Thanks guys. I was unaware of that fact as well.

Brian Eastman · Answer

@Chris SoignierThat is a good point. I was focusing on the transaction question and not the background.@Steve JeffriesIn order to be eligible to sponsor a Solo 401k, you have to be self-employed and have no full time employees. In order to rollover funds into such a plan, you have to have access to those funds. An old IRA or 401k would be accessible. A current employer 410k is typically not available to be rolled over unless you are over age 59 1/2.

Chris Soignier · Answer

@Brian Eastman, don't you have to leave your W-2 job before you can transfer that employer's 401K assets to a Solo 401K?

Steve Jeffries · Answer

Brian Eastman Thanks Brian. That's exactly what I was looking for. I appreciate it.

Brian Eastman · Answer

@Steve JeffriesYour wife is a disqualified party to your plan. Disqualified parties include you, spouse, lineal family and entities like businesses or trusts controlled by you or lineal family.As such, your wife's management company cannot function as a vendor to your plan.As the plan trustee, you (and your wife) are allowed to administer the investments of the plan. You may not benefit from such administration (such as by being compensated or having use of plan assets). Conversely, you may not add value to the plan through the provision of goods or services provided for free. This would be like making un-documented contributions to the plan, thus the prohibition.Much of what you will need to do with respect to property management is within the purview of allowable administration: marketing for tenants, signing leases, paying the expenses and receiving the income. You and/or your wife - in your roles as plan trustees - would be allowed to do such things. You would want to be careful not to cross a line into providing services, so things like evictions or any work on the property should be hired out by the plan to an unrelated 3rd party.If your wife is assisting you with administrative management of plan properties, you would not want to run this under the umbrella of her business, licensing, insurance, etc.