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?
Make the Real Estate Investment
- 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).
- 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.
- 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.