In last week’s post we we discussed when having a ROTH IRA maybe isn’t a great idea..especially for the self-employed individual wanting to establish a self-directed 401K. The conversation was all predicated on the current regulations that do not allow for an individual to rollover ROTH IRA funds into a 401K plan….self-directed or not.
So, to refresh you from that post, we had “Joe” who had $100,000 in ROTH IRA funds and $100,000 from an old employer’s 401K plan. We had determined that as a self-employed individual interested in establishing a self-directed 401K, he could not bring the ROTH funds into the plan; therefore, if he wanted to self-direct his ROTH funds, we would have to establish a separate self-directed ROTH IRA account with the ROTH funds. This, unfortunately, would lead to different accounts and two different fee structures (for both the 401K and ROTH IRA). And, the probability that he could not bring the ROTH IRA funds and old 401K funds into one account for investment purposes. But is this true? I mean we did establish that the ROTH funds cannot come into the 401K…so, we certainly could not bring both sources of funds into one account for investments purposes, could we?!
You see, it is not that the funds cannot be combined into one investment account as long as accurate accounting takes place with the investment of both traditional and ROTH funds into investments. Also, if the funds are brought together, it can only occur at the time of the initial establishment of the accounts.
Broken down more thoroughly using Joe’s example, Joe would establish both a self-directed ROTH IRA ($100,000) and a self-directed 401K ($100,000). Joe would then establish an LLC where both the IRA and 401K could invest (or purchase the assets) of this LLC. Therefore, both the 401K and ROTH IRA could invest in, let’s say, ABC LLC and each account would have proportional share or ownership of the LLC based on the funds brought into the LLC. In Joe’s example, both his ROTH and 401K accounts had $100,000 so that each account would be purchasing a 50% ownership of the LLC. To further assist the client, Joe could possibly establish three bank accounts. One account to hold the ROTH IRA funds, one account to hold 401K funds and a third account. The purpose of the third account would be for Joe to move funds (proportionally, from one or both accounts) into a “master” account for writing checks or wiring funds for investments.
You may ask does the second or third accounts HAVE to be established? In short, no. However, one concern that Joe SHOULD have is the accounting of ROTH and Traditional funds in one account. It is not something that he probably wants to deal with. You see, while it sounds easy at the outset to keep very accurate records of what ROTH and Traditional funds were invested, etc. it can become very complicated and convoluted quickly. By Joe having the ROTH and Traditional funds separated into two different accounts, he can much more easily move funds (e.g., 40% Roth, 60% Traditional) into the one account where the investment is made or check is drawn…and keep accurate records of investment returns so that the respective ROTH or Traditional (401K) can be credited correctly, accurately, and without Joe worrying about how he would ever keep sufficient records if audited.
Now, remember, this is what CAN occur. However, an individual really needs to determine their level of interest in, for example, combining funds into one account…even if separated by having them placed into two separate checking accounts for the one LLC. So, as we discussed, can ROTH IRA funds be brought into a 401K…NO. But, can ROTH IRA funds and 401K funds be brought into one investment account so that the account owner/trustee can invest both ROTH IRA funds and 401K funds from one account….yes. The real question in simple terms is whether they “want to mess with it” or simply keep the funds separate from the onset.
As always, this post is for educational purposes as PGI Agency, Inc. does not dispense tax, legal, financial or investment advice. One should always review and discuss such important issues with the respective professionals.