Converting ROTH to Traditional then to Solo 401K Plausible?

Question

So, I've been searching for how I get my current investments into a Solo 401k.  After doing some digging I found that I cannot roll my current ROTH into a solo 401k.  I believe I can roll it into a traditional IRA which should then allow me to roll it into a solo 401k.  This is rather maddening as every single search comes up with the opposite i.e. traditional IRA to ROTH!  Even when the headline says ROTH to Traditional when you start to read the article it is the other way around!

Where do I find info on doing what I want to do and, is it even possible to do this?  I have money tied up in a ROTH that would be better served in 1031 exchanges.  I have searched on the IRS website but, typical government entity, I can't quite find what I am looking for. Any recommendations on where to find the info would be appreciated.

Brian Eastman · Answer

@Stephen Aki

You cannot convert a Roth IRA to a Traditional IRA.  Simple as that.

A Solo 401(k) cannot accept Roth IRA funds inbound as a rollover.

What you need to explore is a Roth self-directed IRA LLC.  This platform provides the same level of investment flexibility as the Solo 401(k).

You do not need to do 1031 exchanges in a Roth IRA.  There is no taxable gain to the IRA when it sells a property, and no formal exchange is therefore needed.  You simply make another investment.

Daniel Dietz · Answer

@Raj G. , @Dmitriy Fomichenko , @Justin Windham covered what the 'benefits' are pretty good of the benefits of a SOLO401K.

From the 'consumer' side of things I would add that you can 'borrow from' your account which you cant do with a Self Directed IRA. Another  BIG one me over a SDIRA is that when borrowing money there is virtually no paperwork and no taxes due on the profits made with that borrowed money. That does NOT mean one should NOT borrow funds in a SDIRA IF that is your only option available - just that if you DO qualify for a SOLO401K, I can not imagine why a person would use a SDIRA instead.

The taxes at time of eventually withdrawing funds depends on each persons situation. I *think* if a held in a Traditional account, meaning non ROTH, those would be at your ordinary income tax rate. If in a ROTH account, there would be NO tax due.

One of the DISadvantages of using ANY kind of retirement fund, be it Traditional or ROTH, compared to just invest with the cash without investing through the retirement account, is that you need a LOT more down payment with the retirement accounts for rental properties.

Looking at my example above, with that 50K, if I just bought a place withOUT putting it in a retirement account I would be able to buy 250K or more of property since I can borrow all day long at 20% or less down  and 5% interest all day long. Once I put it INTO a retirement account I now am likely to need at LEAST 40% down, so can only buy about 125K of property, or half as much.

The complicated part comes in figuring out if that outweighs the tax deferred or tax free growth of the retirement accounts.

One thing to remember is that it 'seems' like you would have to pay taxes as you go when invested outside of a retirement account, but from my experience for the first 10-12 years you *might* actually have a 'paper loss'. Meaning that with the benefit of depreciation, your taxable income from rentals remains 'negative'. During that time, you are also building equity tax deferred through appreciation and loan paydown.

Options at that point would be to refinance and buy more property or sell via a 1031 exchange and buy a larger property that will be in a 'tax free' range for about the next 10 years.

Many ways to get there, just need to find the one that fits you best.

Dan Dietz

Dmitriy Fomichenko · Answer

@Raj G.

There are numerous benefits of contributing money to Solo 401k:

• Tax deduction, this plan allows contributions up to $61,000 per year per participant. Husband/wife team can potentially lower their taxable income by over $120,000! Think about the tax savings as a result of that (this would also likely result in the lower tax bracket).
• Tax-deferred growth: your investment returns are not diminished by taxes, you will be able to accumulate significantly larger amount of wealth as a result.
• Self-directed plan allows alternative investments: you can invest in real estate, trust deeds, syndications, tax liens, etc. etc. inside of your Solo 401k plan.
• Some plans also allow post-tax (Roth) contributions, that means you pay the taxes upfront, your investments grow tax-free and distributions are tax-free!

Once you understand the benefits and properly utilize this vehicle - you will find it to be great tool helping you build wealth.

Dmitriy Fomichenko · Answer

@Stephen Aki

When you use self-directed IRA your IRA would simply buy the property, it is not an exchange, has nothing to do with 1031.

1031 exchange is utilized when you selling property that you personally own. If you wish to defer capital gain tax on the sale, you can exchange that into another property employing this strategy.

Exchange means that you exchange one property into another property. Perhaps you are not describing your situation clearly. So far I'm only seeing one property you are considering to buy. Is there another property? Please clarify.

Dmitriy Fomichenko · Answer

@Stephen Aki,

There is no way to move Roth IRA (which is post tax) into Traditional IRA (which is pre-tax). However Roth IRA can be self-directed so you can invest it into alternative assets, all gains and income from those investments would be tax-free. It is unclear from your post what your goals are but self-directed Roth IRA can be very powerful tool to help you reach your financial goals.

Dmitriy Fomichenko · Answer

Stepehen,

IRA is tax-deferred account, when you sell property in an IRA you will not owe taxes so you don’t need to utilize 1031 exchange. Simply sell the property, wait until you find another investment and reinvest.

Justin Windham · Answer

@Raj G.

Most participants are motivated by the tax deduction received for the funds they put into a Solo 401k. Passive investments within a Solo 401k grow either tax-deferred (for pre-tax funds) or tax-free (for Roth funds). This is usually a huge benefit compared to making the same investment outside of the Solo 401k.

Pre-tax funds are taxed as ordinary income when distributions are taken after age 59.5.

Daniel Dietz · Answer

@Stephen Aki I ran into almost the EXACT same problem as you a few years ago. Most of my assets were in IRAs, mostly ROTH and some Traditional, and just a small part in 'cash'. I too wanted to put my funds to work. I soon learned about the same bottleneck with the ROTH.

So I started by moving  about half of my ROTH IRA funds to SDIRA that was a ROTH and then I could invest 100% of that into real estate. I then rolled my Traditional IRA into a Traditional SOLO401K (which can THEN be 'rolled within the SOLO plan to a ROTH component). both of these types of plans can also borrow non-recourse loans at about 50-60% LTV to further leverage if desired.

One 'work around' IF you have a lot of basis (contributions) in your ROTH is that *that portion* (contribution) CAN be withdrawn without tax or penalty after they are in for 5 years if memory serves me correctly. So then THAT portion that you just withdrew tax free can be contributed into a SDIRA or SOLO401 as long as you have the 'earned income'. You need to realize that you are giving up tax free income in retirement from the ROTH though in exchange for whatever benefit you see by moving it.

Dan Dietz

George Blower · Answer

@Stephen Aki

Following is a good IRS chart on rollovers.

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

https://www.irs.gov/retirement-plans/plan-particip...

Stephen Aki · Answer

Dmitriy, alles klar!  Kinda, I understand what you are saying about the 1031 exchange now.  This would be the first property so I would want to invest existing ROTH funds into this property.  Later down the road, as I understand it, if I sell this property and buy another one I could execute a 1031 exchange.

Daniel, good information that is definitely helpful in understanding the nuances of this subject, thanks.

Converting ROTH to Traditional then to Solo 401K Plausible?

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