Current IRA to Self Directed IRA conversion?

Question

I currently have an IRA with the company I am employed with through fidelity, invested in the company stock.  I have been using a loan strategy on it to purchase and rehab my properties. Is it possible to switch the rest of the funds into a self directed IRA as I can only access half at a time. As far as closing the account, it is not possible until I leave the company.  Part 2, is there any tax advantage for me doing self directed as opposed to just continue to do the loan program they offer.

Josh Green · Answer

Once you leave the company you can certainly roll it over into an ira which opens up the options considerably in what you invest it in. But keep in mind, if you have an outstanding loan when you leave it will be called. And if you can’t pay it then it is taxed and penalized as a distribution. (Though if it’s a Roth it’s a little differently but the penalties would be on the earnings)

Brian Eastman · Answer

@Byrne McKenna

You are 3 years away from being able to take distributions from your IRA. Sabotaging that now would seem shortsighted to me.

Yes, investing in real estate inside an IRA is different than investing in real estate personally.  So is investing in stocks, but the mechanics are simple and restrictive enough to begin with that you do not notice so much.  Even with the IRA associated restrictions of keeping things at arm's length, it is still pretty simple to get your IRA invested into productive real estate investments and wield significant control.

If you take distributions from your IRA in order to have full access to the funds personally, that will be taxed, which will dramatically reduce the amount of capital you have available to invest.

If you leave the funds in the IRA, switch to a self-directed version, and invest in real estate or perhaps private lending, all of the capital available to your IRA  today will be accessible.  More capital deployed = more income generated in return.  Any income you generate will be tax-sheltered in the IRA, can be reinvested, and will compound tax-free.   Once you reach age 59 1/2, you can leave the principal in place in the IRA continuing to grow, and draw off the income produced as taxable distributions to you.

Simply put, you can kill the goose and have dinner, or your can feed the goose and get those golden eggs for a long time to come.

Byrne McKenna · Answer

Self directed IRA's in real estate seem very restrictive to me.  Lot's of rules and not flexible in the cash management portion of the account.  In my current situation, I am obsessed with getting the IRA money back tax free.  I am considering withdrawing under the irs 72t exception to avoid the 10% penalty.  Then I would use a HELOC to buy another property so that the loan P&I would roughly equal the early annual distribution.  The net result on the new property should yield a small paper loss for the tax return thus lowering my overall tax exposure and shielding the IRA withdrawal from income tax.  Thoughts on this strategy?  (I am retired, age 56  with 7 rentals, no debt, small tax exposure, several IRA's)

Brian Eastman · Answer

@Drake Espenlaub

As noted, your 401(k) is stuck in your employer plan until you change jobs or reach age 59 1/2 while still employed with the company sponsoring the 401(k).

If you have both tax-deferred (Traditional) holdings and Roth holdings in your plan, they may or may not have differing rollover destinations.  A new 401(k) plan, including the self-employed Solo 401(k) version would be able to accept rollovers of both types of funds into a single plan.  If you are not self-employed and therefore not eligible for that plan type in the future, then the funds would need to go to separate Traditional and Roth IRA's, respectively.

The IRS provides a rollover chart to help understand what can go where when moving funds between plans:

https://www.irs.gov/pub/irs-tege/rollover_chart.pd...

Be careful with the loan in your current plan, as that may be deemed a taxable distribution if it is still outstanding when you leave your current job.  Alternately, it may be allowed to remain open, but would require that you keep all of the funds with the current employer plan until you have it paid off.  Check your current plan's Summary Plan Description (aka Employee Handbook) or speak with your plan administrator to be sure you understand your options.

Using the opportunity of an employer provided 401(K), especially if it provides a match, is a great way to accumulate some tax-sheltered savings.  If. once you change jobs as so many of us do relatively frequently these days, you move that to a self-directed IRA or 401(K) where you have broader investment choices such as real estate and private lending, then you have a path to actually grow that tax-sheltered savings to a meaningful amount and take advantage of the compounding benefits such plans provide.

Carl Fischer · Answer

@Drake Espenlaub

The Roth component of your 401k is most likely your salary deferrals. The company match or contribution is most likely not Roth but pre tax money. If you leave yes you can put it in a Roth IRA and pretax ina traditional ira or convert it all to a single Roth.

Drake Espenlaub · Answer

Once I leave said company, is it then possible to take those funds and put them in a self directed IRA, or once in a 401k must stay in 401k? Also the 401k I have is a roth IRA.

Current IRA to Self Directed IRA conversion?

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