After verifying with your solo 401k plan provider that the plan allows for in-plan conversions, the next step is to convert the real-estate property held in the pretax portion of the solo 401k to the Roth solo 401k (Roth designated account).
Here are the typical steps that apply to an in-kind, in-plan conversion of a real-estate property held in a self-directed solo 401k:
- Get the property appraised: Federal taxes and possibly state taxes will be due on the amount converted. Therefore, it is important to have the property appraised by an independent third-party property appraiser in order to determine the value of the property subject to taxes.
- Grant the property: Once appraised, grant the property from the pretax solo 401k to the Roth solo 401k.
For example: If title to the property reads as follows:
Joe Smith, Trustee of ZYX Trust
The new titling would be as follows after the conversion: Joe Smith, Trustee of ZYX Trust (ROTH)
3. Fill out the conversion form: The solo 401k provider will need to issue a Form 1099-R by February of the following year to report the taxable conversion to the IRS.
4. Open a separate solo 401k bank account: If you have not yet opened a separate bank account under the solo 401k plan to hold the Roth solo 401k funds, make sure to do so as all the income and expenses associated with the Roth solo 401k owned real-estate property will need to be accounted through that account.