Continued from Part I
Question: How do I combine retirement funds from the newly formed self-directed Solo 401k with $24,600 and newly formed self-directed Roth IRA of $84,000 held in trust?
Answer: The 401k funds will be in the Solo 401k Trust and IRA retirement funds will be held by the custodian. If you choose to, you may pull your retirement funds together and acquire one investment property. Let’s use an example of a property valued at $100,000. You will use $25,000 from your Solo 401k Trust and $75,000 from your IRA custodial account. The ownership percentage will be 25%/75%. All of the income and expenses must be split according to the ownership percentage.
Question: For example lets say I buy a house for $40,000. It needs $8,000 for repairs. It also needs property management who I place $2000 with to start the account up. Let’s say I have to fly to Atlanta to find house and cost for trip is $1,000. Are all these amounts paid for by the Self directed Roth of $84,000 or are any paid by me outside of Roth funds. Obviously I want to pay as much outside of Roth in order to conserve retirement funds to purchase assets.
Answer: All repair expenses must be paid from Roth IRA since it owns the property. The trip expense is not directly related to the investment, you don’t have to fly to Atlanta to acquire this property, therefore if you choose to make the trip you could use personal funds for the trip expense.
Question: Now there is about $33,000 left in Roth, not enough to buy a another house. But there is still $24,600 in the self directed Solo 401k. Let’s say I combine the two amounts for a total of $57,600. I buy another identical priced house as mentioned for $40,000. What is the process for combining the amounts to buy? How is accounting and distribution of income and expenses handled?
Answer: Just as I mentioned in the example above, all the income and expenses must be distributed according to the ownership percentage.
Question: The Solo 401k is created with the $24,600 is exempt from UDFI. Is this subject to the unrelated Debt Financed income tax because it’s not a self directed solo 401k? I assume not because none of the property is financed, it’s all cash.
Answer: If there is no financing involved – there is no UDFI tax, regardless if you use IRA or 401k. However, when you use 401k and finance the property – it will not be subject to the UDFI, only when you use IRA funds with leverage.
Question: If I were to buy a property with financing in this self directed Roth IRA, would it then be subject to to UDFI?
Question: Oh and a last question, Can an LLC be formed to avoid having to use a custodian to hold the Roth IRA of $84,000? I thought I read somewhere that could be done.
Answer: You are referring to Checkbook IRA or IRA owned LLC. By creating an IRA LLC you can have checkbook control of your IRA and eliminate much of the custodian fees. However, you can’t eliminate custodian completely, IRS requires that IRA be held by the third party custodian. In this case the custodian holds an IRA with one asset – LLC. The LLC in turn can hold multiple assets and as a manager of the LLC you have direct control over the assets bypassing the custodian. You can learn more about this structure HERE.