Apartment Syndicator · Charleston, SC · Member since 2016 · 973 posts · 728 votes
What have you done to make the most of your retirement accounts (401k, IRA, 403B, ESA, etc.)?
I recently converted an old 401k that wasn’t doing much for me into a self direct individual retirement account (commonly referred to as a SDIRA). I was unhappy with the 401k because I had limited ability to invest in anything other than mutual funds and then the market just goes up and down and sometimes there is nothing to show for it from a return perspective. I liquidated the 401k and transferred the entire balance to a sdira managed by a custodian to ensure I stay compliant with IRS rules. Personally I use equity trust company but there are many companies out there. Using the sdira I’ve been able to passively invest in multi family syndication deals and get the great benefits of real estate like cash flow and value add appreciation. I can’t invest in deals that I’m personally a GP of so it’s a way to diversify. Overall, I’m happy with the setup and performance of my sdira since I have complete control of what to invest in.
Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
7y
@Jamie Burns I'm probably going to get vilified in this thread for this. Why not just stack cash outside of the 401k and use that to invest in real estate? You mentioned that you already reduced your contributions to be exactly the employer match. Therefore, I'm assuming there's a spread between your previous percentage contributed to today's contribution percentage. I think it's a good idea to have both real estate and 401k assets to be diversified. I personally would never self direct to invest in real estate directly. I keep the 401k and real estate separate.
I have not been closely monitoring this thread and do not know if there is context behind this very big question about UBIT.
UBIT is a tax that applies to a tax exempt when one of two types of taxable income is created.
Unrelated Business Taxable Income (UBTI) is generated when an IRA or Solo 401(k) engages in a trade or business on a regular or repeated basis. In real estate, a business activity is things like wholesaling, flipping, or new property construction for immediate sale. Passive forms of income such as rental income, interest on notes, or the sale of a property held over time to produce rental income are not considered to be trade or business activities and therefore are not generating UBTI. The tax implications of UBTI can be significant and usually will spoil a deal.
Unrelated Debt-Financed Income (UDFI) is generated when an IRA or Solo 401(k) uses debt-financing. Mortgages on real property are a common example. The portion of the income that the plan receives as a result of the non-plan (borrowed) money is considered taxable. A Solo 401(k) is exempted from this tax when the debt-financing is used for the acquisition of real property, but not for other types of debt investments. The tax implications of UDFI are generally nominal and will not usually hurt a good deal. The project will be producing leveraged returns that are higher than an all cash deal would produce. The amount lost to UBIT paid on UDFI does not significantly change that.
UBIT would not generally apply to a passive SDIRA investment into real estate that does not use leverage. IRA investments into an active trade or business or an investment in which the IRA obtains financing to purchase the asset will change the circumstances and UBIT (or UDFI tax) would become relevant.