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Can I Buy A Property In the Solo 401k with Both Roth and Traditional Funds?
Can I Buy A Property In the Solo 401k with Both Roth and Traditional Funds?
Updated over a week ago

With the Solo 401k by Nabers Group, you automatically have a designated Roth sub-account built right in. There is no need for extra paperwork and your Solo 401k can hold both Roth and Traditional funds. You can bring in Roth funds to your Solo 401k via rollovers (from another Roth 401k plan), new Roth contributions, or by doing an in-plan Roth conversion. 

While your Solo 401k can accommodate both Roth and pre-tax (traditional) 401k funds, it is generally recommended to keep them separate, either by having separate bank accounts or by having separate bookkeeping entries. 

Most investors choose separate bank accounts (for Roth and pre-tax funds) for less to bookkeeping complexity.

We're often asked if it's possible to purchase an investment (such as a rental property) mixing both traditional and Roth funds in one deal.

When it comes to buying an asset, using Traditional and Roth to fund the investment is possible if you keep excellent records of what percentage is Roth and Traditional. 

The percentage of profits, income, and expenses must be congruent with the percentage invested. 

In other words, you cannot move money or profits from Traditional to Roth without doing an official Roth conversion. Likewise, expenses must be evenly divided between Roth and traditional funds.

Think about an investment into an LLC - if you put in 50% of the funds and someone else puts in 50% of the funds you would each earn 50% of the profits and be responsible for 50% of the expenses.

Purchasing an investment in the Solo 401k with both Roth and pre-tax (traditional) funds functions much the same way.

Let's look at an example:

Sally's Solo 401k Trust purchased a rental property for $200,000. Sally used funds from her 401k trust to purchase the property, the property is titled in the name of her 401k trust and the trust tax ID number was used to complete the transaction.

Sally invested 45% Roth funds and 55% traditional funds into the deal. She did not use any leverage to purchase the property, so she put in $90,000 Roth funds to purchase the deal, and $110,000 in pre-tax (traditional) funds.

The monthly rent on the rental property is $2,000 which will yield  $24,000 per year in rents (a 10% ROI).

Each month, $900 would be deposited into the Solo 401k Roth bank account and $1,100 would be deposited into the traditional funds Solo 401k bank account. (See this article on why to have two separate bank accounts for Roth and non-Roth funds in your 401k trust).

Similarly, expenses must be divided according to initial capital contributions.

This is where things can get tricky.

Let's say the roof needs replacing and will cost $14,273.58.

The Roth owed portion is $6,423.11 and $7,850.47 should be paid from traditional funds.

But what if you only have $5,500 in Roth funds to cover the expense?

The calculation of capital ownership (between Roth and pre-tax) doesn't change.  In other words, you can't pay the Roth portion of expenses with traditional (pre-tax) funds because they are two separate tax classifications. 

In this situation you'd have to convert some funds to Roth to pay the expense, which also adds the additional tax burden of completing the Roth conversion just so you can pay the expense with the correct portion of Roth funds.

As you can see, this takes careful planning and meticulous records to ensure you have enough in your coffers of each type of funds (Roth and pre-tax) to cover any expenses that may come up.

In keeping things conservative, most CPAs will recommend pre-tax and Roth funds not be combined in any single investment because of the complicated and often arduous record-keeping needed. 

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