Use After-Tax & Pre Tax Self-Directed Solo 401k to Invest in Real Estate

QUESTION: 

If I do the “Mega Back Door Roth” with my Solo 401K can I use both the before-tax and after-tax funds combined to invest in the same real estate deal?

ANSWER: 

Set the Stage
 
In short, yes. First, before you process the mega back door Roth solo 401k conversion (a.k.a. backdoor 401k conversion), make sure you open separate bank or brokerage accounts under the solo 401k plan–one to hold the voluntary after-tax solo 401k contributions and the second one to hold the Roth solo 401k funds. CLICK HERE, to learn more about this. 
 
Also, if you have not done so already, make sure to open a separate bank or brokerage account to hold the pretax solo 401k funds. To learn more about each contribution (e.g., pretax, Roth and voluntary after-tax) type, VISIT HERE
 
 
You could then make contributions to the voluntary after-tax Solo 401k bucket based on your reported earned income from self-employment. 
 
subsequently,  the voluntary after-tax funds would get converted to the  Roth Solo 401k designated account.
 

Make the Real Estate Investment

 
After the funds are setting the in pretax and Roth solo 401k buckets (bank or brokerage accounts), it is time to make the real estate investment under the solo 401k plan.
 
Option 1: Make the Purchase Directly Through the Solo 401k Plan
 
  • Under this method, the solo 401k plan takes title to the property.
  • Both pretax and Roth solo 401k funds are combined to make the purchase. 
  • Funds are wired from both the pretax solo 401k bucket and the Roth solo 401k bucket to the title company, resulting in the property being owned by the same solo 401k plan but by different sources (i.e., pretax and Roth funds).  
Going Forward
 
  • After the purchase, both income and expenses associated with the now owned solo 401k property would need to be allocated based on the basis (the purchase price). 
  • For example, if the solo 401k purchased a property for $100K and it was a 50/50 split between the Pretax and Roth accounts, each sub-account would send $50K for the purchase. Then if the property earned $10K total for rent and had $2K in expenses each sub-account would receive $4K ($10 – $2K= $8K) 50/50= $4k each.  
Option 2: Invest the Solo 401k in an LLC and Make the Investment Through the LLC
 
  • Another way of investing both pretax solo 401k and Roth solo 401k funds in the same property is to first invest the solo 401k in an LLC, resulting in a solo 401k owned LLC (that is, the solo 401k is the sole member of the LLC).  To learn about this process, click here
  • When is time to make the real estate purchase, title to the property is taken in the name of the LLC not the solo 401k. 
  • Since the property is purchased through the LLC, the funds flow from the LLC bank account to the title company for the property purchase, and, going forward, all expenses and income flow through the LLC bank account. 
  • Later, when the property is sold, the proceeds from the sale flow back to the LLC and future properties can be purchase through the LLC, or the funds can be returned to the solo solo 401k plan Roth and pretax buckets based on the initial investment into the LLC, with future investments made through the solo 401k plan. 

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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