Investing in Real Estate with Mixture of Pre-tax and Roth Self-Directed 401(k) funds

QUESTION:

I’m wondering if it is it possible to buy real estate with a mixture of pre-tax self-directed 401(k) funds and self-directed Roth 401(k) funds held within the same 401(k) trust? Is it still possible to use a non-recourse loan as well if there is a mixture of pre-tax 401k and Roth 401k funds?

ANSWER:

In short, yes. A self-directed 401k (a.k.a solo 401k) that allows for both pretax and Roth contributions is considered one plan, not separate plans. As such, both the pretax and Roth funds within the self-directed 401k plan may be pooled and invested in the same property.

The following items apply when investing a self-directed 401k that contains both Roth and pre-tax funds in the same real estate property:

  1. Title to the property is taken in the name of the solo 401k plan even when both sources (i.e., pretax and Roth funds) are pooled to invest in the same property.

For example:

  • XYZ Trust, Sarah Byrd, Trustee

As you can see in the example above, title to the property is taken in the name of the solo 401k plan.

2. At time of funding the purchase, funds will flow from the respective self-directed 401k bank or brokerage accounts (i.e, the pretax and Roth accounts). This is when the ownership percentages are determined internally (i.e., at the Plan level).

For example, if the property purchase price is $100,000 and you use $40,000 of pretax self-directed 401k funds and $60,000 of Roth self-directed 401k funds, title to the property is still taken in the name of the plan as described above, but the expenses and income in connection with the property will need to be divided 40/60 between the Roth and the pretax buckets.

Using Borrowed Funds (Non-Recourse Loan /Debt Financing)

Yes, a non-recourse loan may be used when investing a self-directed 401k in real estate whether solely investing pre-tax funds or a combination of pretax and Roth funds.  While the non-recourse loan is made to just one self-directed 401k plan, the non-recourse loan payments will need to be made with both pretax and Roth solo 401k funds based on the amount of funds invested by the solo 401k plan as a whole. See the percentages used in the example above where both Roth and pre-tax funds within the same self-directed 401k were used to invest in the same property.

Pooling Sources QUESTION:

I am interested in Real-estate investment. The Rental income / Capital gain or any other income pertaining to real estate investment ( for ROTH portion & After-tax ) is tax free?

  • First, once made, you will want to convert the voluntary after-tax contribution immediately to the Roth solo 401(k). Therefore you would end up pooling both pretax solo 401(k) funds and Roth solo 401k funds in the same investment. As a result, yes the income and expenses would be divided based or the ownership percentages which is determine by how much funds is invested from each solo 401k source of funds at the time of purchase. Furthermore, yes investment gains that flow back to the Roth solo 401(k) will grow tax-free.

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About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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