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Self-directed 401k FAQ – How do I title investment made with both Pre tax & Roth Solo 401k funds?
QUESTION:
For our solo 401(k) we have Pretax, Roth, and Voluntary After-tax for both my spouse and myself money in different accounts. Can we identify the plan as the owner of the real estate investment? Or do we need to identify the percent ownership based on the different account types?
RESPONSE:
Great question!
Some of the top reasons that clients set up accounts with us are the ability to have Roth and Mega Backdoor Roth Solo 401k funds as well as the ability to invest in alternative investments such as real estate.
Moreover, if two spouses are working in the same business, they can both participate in the same solo 401k plan sponsored by such self-employed business with their respective funds held in separate sub-accounts (e.g. pre-tax, Roth, and/or after-tax sub-accounts for each of them).
If both spouses invest funds in the same real estate investment (i.e. both invest Pre-tax and/or Roth solo 401k funds), it is deemed an investment by one solo 401k plan. As such, the real estate is simply titled in the name of the Solo 401k and the percentage ownership between participants and/or based on different fund types invested is tracked at the plan level.
At the time the real estate is purchased, funds would flow to purchase the real estate (e.g. flow to the title company) from the respective Solo 401k sub-accounts (i.e. the pre-tax and/or Roth Solo 401k sub-accounts of each spouse) so two (or more) checks or wires would be sent.
With respect to the ongoing income and expenses related to the real estate investment, it would be acceptable for administrative ease to manage the same from one single solo 401k bank/brokerage account and then the funds can be divided between the pretax and/or Roth solo 401k bank/brokerage accounts for each Solo 401k participant based on the investment percentages.
