If you solo 401k plan allows for Roth solo 401k designated account funds, physical real estate held in the pretax solo 401k holding account can be fully or partially converted in-kind to the Roth solo 401k designated holding account.
In this blog post we will discuss the logistics and rules for processing partial in-plan conversions from the pretax solo 401k to the Roth solo 401k for those looking to spread the tax hit since Roth solo 401k conversions are taxed at earned income tax rates.
The general steps involved in the partial, in-kind, in-plan conversion of real estate held in the pretax solo 401k to the Roth solo 401k:
1. The property (real estate) will need to be appraised (third party appraisal) each time to determine the total value of the property.
2. The percentage of the real property converted will need to be granted from the pretax solo 401k holding account to the Roth solo 401k designated account.
For Example:The third-party appraisal confirms the total value of the real estate property at $500,000. You elect (you fill out and sign the in-plan Roth solo 401k conversion form-provided by the solo 401k plan provider) to process a partial in-plan conversion of 20% ($100,000 value) of the property held in the pretax solo 401k to the Roth solo 401k designed account. As the trustee of the solo 401k plan, you have the property recorded as follows with the county recorder.
How the Property Deed is Recorded:
Jane Do, Trustee of ABC Trust (PRETAX Designated Account), an undivided 80% and Jane Do, Trustee of ABC Trust (ROTH Designated Account) and undivided 20%
Going Forward:
- All expenses are divided 80/20 between the PRETAX solo 401k and ROTH solo 401k.
- All income is shared 80/20 between the PRETAX solo 401k and ROTH solo 401k.
Future In-Plan Conversions
Until the property has been fully converted in-kind from the pretax solo 401k to the Roth solo 401k, you would repeat the same steps above for future in-plan conversions including having the property value by a third-party appraiser, filling out the in-plan conversion form and updating the property deed with the county recorder to list the new ownership percentages by both the pretax solo 401k and the Roth solo 401k.
Second Solo 401k Bank Account
Once the in-kind conversion has been processed, a second bank account will need be opened in the name of the solo 401k to hold the rental income generated from the Roth solo 401k owned property as well as to pay for the applicable ongoing property expenses (e.g, property insurance and repairs).
While the existing EIN for the solo 401k is also used when opening the second bank account to hold the Roth solo 401k funds, the new bank account is generally titled as follows to easily distinguish between both solo 401k bank accounts (the pretax and the Roth): ABC Trust (Roth Designated Account) F.B.O. Jane Do.
