IRA distribution to purchase rental house | Deposit house into a self-directed 401k

QUESTION/BACKGROUND: I took a cash distribution from my Vanguard IRA and then purchased a rental house in San Diego, CA, which I would now like to deposit as a rollover to a self-directed 401k. Note that it has been less than 60 days since I received the IRA distribution check from Vanguard and purchased the rental house.  If I open a self-directed 401k with your firm, can you help me process the rental house as a non-taxable rollover the self-directed 401k?

ANSWER: Unfortunately, when a cash distribution is processed from an IRA, whether a Traditional, SEP or SIMPLE IRA, the IRA rollover rules require that in turn cash proceeds are deposited to another IRA or qualified plan including a self-directed 401k (a type of 401k for the self employed) within 60 days in order to qualify as non-taxable movement of funds. As such, you will not be able to deposit the rental house that you purchased with IRA funds to a self-directed 401k.  Instead, you will need to come up with the liquid funds and deposit them into the self-directed 401k, the same IRA that they originated from or another IRA before the 60 day window expires in order a to avoid subjecting the distribution to payment of taxes and possible early distribution penalties.

On a separate note, while confusing, the IRA rollover rules permit the rollover of cash proceeds stemming from an asset like a rental house that was distributed from an IRA to a self-directed 401k provided, of course, the 60 day window has not expired.

Thank you,

Susan in CA

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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