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Mega Backdoor Roth 401(k) Rollover Rules and more | Client Q&A

AdMail Podcast

IRA Financial’s Adam Bergman Esq. answers questions about investing in real estate with a Solo 401(k), the mega backdoor Roth 401(k) rules and the five year Roth IRA requirements.

Question 1 from YouTube: I have a 401(k) and want to transfer it to a Solo 401(k) where I can invest in real estate. Is there a penalty for that? Is there a limit in the number of transactions without being penalized?

First, there is no penalty for moving funds from your 401(k) to a Solo 401(k). However, you must have a triggering event before you can move money from one 401(k) to another. The three most common triggering events are: 1) separating from your job, 2) the plan is terminated and 3) reaching the age of 59 1/2. If you do not satisfy any of these conditions, you cannot distribute funds. Note: there are “hardship distributions,” but you cannot transfer funds into a new plan.

Of course, when you do have a triggering event, you can pretty much do what you want with the funds. Your best option is to transfer funds to a new plan (whether a Solo 401(k), IRA or a new workplace plan).

Secondly, there is no limit to the number of transactions you can make. So long as they are not prohibited by the IRS, you can generally make the investment. As for real estate investments, there may be a limitations to how many “buy and sells” you can perform, before it’s considered an active business. There is no clear cut guidance as to when this threshold is reached. If it is considered a business, you may be subject to the UBTI tax, which can go as high as 37%. Three or four transactions per year should be safe from the tax. If you’re doing a dozen each year, it certainly seems you have an active business and should be wear of tax implications.

Question 2 from Mark M in St. Louis, MO: If I do an after-tax mega backdoor Roth, can I immediately rollover to an IRA?

The mega backdoor Roth is a strategy, particularly for the self-employed, where you can contribute after-tax funds to a 401(k), dollar for dollar, up to the annual limit. You can then immediately roll over those funds to an IRA. The, you convert the after-tax funds in the IRA to a Roth IRA.

We just talked about the triggering event rules for the 401(k) plan. However, you don’t need one when you are dealing with after-tax contributions. It’s important to keep in mind that your contributions are not traditional nor Roth. Therefore, it only makes sense to make them if you move them into a Roth IRA. You can watch a 90 second video about the strategy here.

Question 3 from Peggy B in Addison, TX: If I roll over Roth 401(k) funds to a Roth IRA and I am over the age of 59 1/2, do I need to wait five years to pull the money out?

Going along the same theme of these questions, since Peggy is over 59 1/2, she can move her Roth 401(k) funds out of her plan, even if she’s still working for the same company. Since they are Roth funds, they can be rolled over in a Roth IRA and continue to grow tax free. But what about the five-year waiting period?

Normally, you need to be age 59 1/2 and the Roth IRA must be open for at leave five years before you can enjoy tax-free distributions from the plan. The Roth 401(k) has the same waiting period. Peggy might have satisfied the period in the 401(k), however that doesn’t count for the Roth IRA. If the account is brand new, she would have to wait another five years to get tax-free earnings out of the plan. Mr. Bergman always suggests opening a Roth IRA as soon as you can. Throw a few dollars in there just to get the clock ticking. That way, when you roll over funds into the plan, the five-year waiting period will have been satisfied already!

Learn More: Can I Still do a Mega Backdoor Roth in 2022?

AdMail – Keep it Coming

We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].

As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!


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