My husband has recently transitioned employers and we are considering the idea of rolling over his previous employer’s provided 401(k) into a self-directed IRA. Our primary interest is using these funds to invest in real estate. From the details provided online, we are mainly interested in the Solo 401(k) or the IRA LLC. The only tricky part that I foresee is that part of his current investment is Roth and the other part is Traditional. Would we be able to transfer the two funds into equivalent structures or would we need to consolidate somehow – choosing either Roth or Traditional for the full amount?
Both the IRA LLC & The Solo 401k Plan May Invest in Real Estate and Other Alternative Investment
Both the solo 401k and the IRA LLC allow for investing in real estate. In order to participate in a solo 401k plan certain eligibility requirements apply which don’t apply to an IRA LLC
. As a result, most individuals qualify for the IRA LLC, but not the solo 401k plan.
Qualifying for a Solo 401k Plan
In order to qualify for a solo 401k plan, you need to be performing at minimum part-time self-employment activity in order to open and continue with the Solo
401(k) plan, and it has to be active income versus passive investment income. One way to distinguish passive income versus active income is that active income is subject to Social Security taxes were as passive income is not because it’s considered capital gains income. Visit Here
to learn more about the solo 401k eligibility requirements.
If Both Spouse Work for the Self-Employed Business
Since a Solo 401k is for business owners and their spouses, the business owner’s spouse is also eligible to participate in the same Solo 401k provided he or she is also self-employed in the business.
Roth IRA Transfer Restriction
Don’t Confuse the Roth IRA Transfer Restriction with the Roth 401k
While the Roth IRA rules do not allow for the transfer of a Roth IRA, the rules do allow for the transfer of a former employer Roth 401k, Roth 403b, Roth 457b and Roth TSP to a Roth solo 401k provided they are held in a separate bank or brokerage account within the solo 401k plan.
Multi Member IRA LLC
If you decided to go the IRA LLC route, both the pretax IRA and the Roth IRA can be invested in the same LLC; however, this will trigger annual required federal tax filings at the LLC level because an LLC with more than one member (e.g., a Roth IRA and a Traditional IRA) is treated as a partnership. Therefore, a Form 1065 and a schedule K-1 would need to filed on an annual basis. To learn more about the multi meber IRA LLC rules, visit the following: https://www.mysolo401k.net/single-member-ira-llc-multi-member-ira-llc/
Unlike a Solo 401k, the IRA LLC is Subject to UDFI
Similar to the UBIT
, there is a another tax called the Unrelated Debt-Financed Income (UDFI
) tax on IRA investment income derived from debt-financed property, proportionate to the debt on the property. HOWEVER, UDFI does not apply to solo 401k plans so this is why individuals prefer solo 401k plans over IRAs for investing in real estate where a none-recourse loan will be used to invest in real estate.
In sum, while we can assist in opening both the IRA LLC and the solo 401k plan, it is important to understand the above rules prior to proceeding.