Transferring $from TSP TO SELF DIRECTED IRA

[Miguel Romero]

I was listening to podcast #49 and @amanda han who is a cpa said that if we currently have a 401k with my current employer, that i can transfer that money to a self directed 401 and then use that money to purchase real investment property. My question is, how does that work? Can i do it to purchase my first ever rental property? Would that then be a loan or an actual withdrawal?

[Mark Nolan]

@Miguel Romero

This answers your question of how a self-directed 401k is invested in real estate:

After opening the self-directed 401k and funding the bank account:

• Put offer/contract together listing the Solo 401k account’s name (see below)

• Fund earnest deposit by writing check from the solo 401k bank account

• Submit all documents to your real estate professional(s)

Before looking for real-estate property

If you haven’t already opened and funded the Solo 401k, make sure to first do that. You need to open a self-directed 401k so that you have the Solo 401k plan “name” which will be listed on all the real estate forms. Keep in mind that the self-employed 401k will be purchasing the property, and to comply with the regulations, fees associated with the real estate purchase must be paid with Solo 401k funds.

Establish the Solo 401k Account

Once the Solo 401k plan documents have been drafted, the solo 401k documents listing the Solo 401k “name” are used to open the self-directed solo 401k bank account.

Fund the Solo 401k bank account

The speed of funding a self-employed 401k account depends on how it is funded. Funding methods include new deductible contribution, IRA rollover, transfer from another qualified plan including a Solo 401k/Individual 401k or former employer 401k, 403b, Defined Benefit Plan, 457b or Thrift Savings Plan.

Determine property purchasing method

After the solo 401k bank account is established, proceed with making real estate purchase. As trustee of the solo 401k, determine one of the following purchasing methods:

Choose purchasing method

Solo 401k purchases 100% of property with all cash no loan;

Solo 401k enters into a tenants-in-common (TIC) transaction using all cash only; or

Solo 401k purchases 100% of real property using leverage (Solo 401k non-recourse loan)

Put offer together / contract

When putting offer together, make sure to list the Solo 401k as the buyer. Remember that the Solo 401k is a separate investor/entity from you. Therefore, the solo 401k name must be listed on all purchasing documents (see below for more on this). If purchasing under tenants-in-common, make sure to reflect the Solo 401k plan’s purchase portion separately. The Solo 401k pan’s title should read as follows, for example:

Shawn Do, Trustee of XYZ Solo 401k Trust

IMPORTANT: The regulations prohibit the assignment of a contract first drawn up solely in the name of the Solo 401k trustee’s name to the Solo 401k account.

Make a deposit / earnest deposit

When the solo 401k purchases property, the Solo 401k is required to fund any necessary deposit or earnest funds.

Closing

At closing, you, as trustee of the Solo 401k, will approve and sign all documents and then submit them to the closing agent along with a check form the solo 401k bank account for the purchase.

Vesting of all documents

• Shawn Do, Trustee of XYZ Solo 401k Trust

Ongoing maintenance

All ongoing expenses in connection with the solo 401k real estate investment must be paid from the Solo 401k checking account. Never pay expenses with personal funds (non-Solo 401k funds) as the solo 401k prohibited transactions disallow it. For this reason, it's important that the self-directed solo 401k maintains enough liquid cash in order to cover expenses such as HOA dues, property tax, etc.