401k, IRA, Roth IRA and other retirement stuffs

Tax, SDIRAs & Cost Segregation
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401k, IRA, Roth IRA and other retirement stuffs

Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes

Was hoping someone familiar with the matter could shed some light on the matter.

I'm 30 years old now. I will have the option of retiring in 5-7 years. I probably wont, but I will have the option. I've invested all my money in RE, and have always done the minimum amount in my 401k that my employer matches. 

I would like to start doing more to reduce my taxable income for the next 5 or so years. 

I'd like to roll my 401k into a traditional IRA and then set up a Roth IRA conversion ladder to avoid the 10% penalty tax. I can't wait 30 years to touch that money and I also can't pay a 10% tax penalty for early withdrawal. This was one of the "loopholes" I found.

My question is - Will this all be possible, roll my employer sponsored 401k into a regular ole IRA, set up a roth IRA conversion ladder (takes 5 years), Sit back and drink fruity drinks on the beach.

Anyone familiar with the matter please chime in and feel free to add anything you can think of that is relevant to the topic. If you think this is a terrible idea, I'm insane, etc please say so, but include WHY you think so. That way I have something to work with. 

Happy investing.

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Luka Milicevic

The first barrier will be getting the ability to move funds.  Generally speaking, a current employer 401(k) will be locked into that plan so long as you are working for the company.  In some cases a plan may allow for an "in-service" distribution for rollover, but that is rare.

If you are self-employed, then you can look at a Solo 401(k) plan which may be more suited to your goals of the Roth conversion.  Your title calls yourself a "developer", so if you have activities you engage in that create earned income instead of just passive earnings, then that might qualify as self-employment.

A Solo 401(k) can hold both tax-deferred and Roth funds, so you could do your ladder of incremental conversions over time in one plan.

The Solo 401(k) would also have the benefit of higher contributions, potentially as high as $56,000 in your age bracket, depending on income.  Of this, you can make $19,000 directly as Roth contributions, without getting phased out due to higher income.

And, with a self-directed Solo 401(k) you could put that tax-sheltered money to work in the asset where you are having success - real estate.

I think the desire to sit on a beach and sip fruity drinks is "totally insane".  You really should plan to tie yourself to a desk for 30+ years instead.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    7y

    @Luka Milicevic

    The first barrier will be getting the ability to move funds.  Generally speaking, a current employer 401(k) will be locked into that plan so long as you are working for the company.  In some cases a plan may allow for an "in-service" distribution for rollover, but that is rare.

    If you are self-employed, then you can look at a Solo 401(k) plan which may be more suited to your goals of the Roth conversion.  Your title calls yourself a "developer", so if you have activities you engage in that create earned income instead of just passive earnings, then that might qualify as self-employment.

    A Solo 401(k) can hold both tax-deferred and Roth funds, so you could do your ladder of incremental conversions over time in one plan.

    The Solo 401(k) would also have the benefit of higher contributions, potentially as high as $56,000 in your age bracket, depending on income.  Of this, you can make $19,000 directly as Roth contributions, without getting phased out due to higher income.

    And, with a self-directed Solo 401(k) you could put that tax-sheltered money to work in the asset where you are having success - real estate.

    I think the desire to sit on a beach and sip fruity drinks is "totally insane".  You really should plan to tie yourself to a desk for 30+ years instead.

    3Reply
  • Luka Milicevic
    OP
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    7y

    @Brian Eastman

    Wow! Fantastic response!

    Thank you for your insight. I'm going to have to reach out to an IRA/401k advisor such as yourself at some point. I like to think I know a bit about finance but this part is at the moment a little above my pay grade.

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    7y

    @Luka Milicevic

    It sounds like you're on an exciting path. A Solo 401k is probably your best tool to do as you describe if you are eligible. The Roth 401k funds within it can be transferred to a Roth IRA if you do indeed retire and lose Solo 401k eligibility.

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  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    7y

    @Luka Milicevic

    If you are self-employed with no full-time w-2 employees, you can set up a Roth Solo 401k which enjoys certain advantages over a Roth IRA.

    Higher Contribution Limits:

    • Roth Solo 401k accounts enjoy much higher contribution limits than Roth IRA accounts.
    • For example, if you select a Solo 401k provider which allows for voluntary after-tax contributions and in-plan conversion to a Roth sub-account (and you have sufficient self-employment), you would be able to make a combination of Roth and voluntary after-tax contributions for 2019 which would result in up to $56,000 (or $62,000 if you are 50 or older) in your Roth Solo 401k sub-account.

    Exempt from Unrelated Debt Finance Income Tax:

    • While investment income from real estate that is acquired with debt (which must be non-recourse financing) and held in a Roth IRA is subject to UDFI tax, the same property held in a Solo 401k is generally exempt from UDFI tax.

    Early Withdrawals

    • While the contributions can be withdrawn from a Roth IRA before the earnings, any early withdrawal from a Roth 401k is subject to the pro-rate rules which means that you must take both the basis and the gains.
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  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    7y

    @Luka Milicevic

    Even if you have employees and not a SOLO account you may be able to use your 401k for alternative investments. In addition, you can take distributions without penalty by using “substantially equal periodic payments”. Google that and “72t distributions” for other allowable non penalty distributions. Ask your cpa to help you. 

    [email protected]215-283-2868
    1Reply
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