Setting up a eQRP vs. SDIRA

[David Chwaszczewski]

Has anyone done an eQRP?  I am looking into the company Total Control Financial, but wanted to see if anyone has setup up one with the company before.  Seems like it may be better control of your money then SDIRA and less fees.  If anyone has setup a eQRP please let me know any Pro's or Con's.

Thanks!

[Steve C.]

@Brian Eastman

BTW, tax in an IRA on Unrelated Debt Financed Income may reach 30%+, but that would be on such a small amount of net taxable income after available deductions that the effective tax rate for the deal is generally not significant. Trying to create a fit for a 401k when no legitimate fit is available is not going to be worthwhile.

Thank you Brian and Bernard for the feedback. 

Brain, can you explain above comment? So UBTI can theoretically reach 30%, but it is very unlikely in most cases?

[Brian Eastman]

@Steve C.

If a deal is 70% Debt financed, then 70% of the gross income is taxable as UDFI.

You then apply a $1000 exemption and 70% of allowable deductions like depreciation, interest, etc.

The resulting net taxable income is then subject to trust tax rates, which scale in brackets.

A typical $100K investment in a syndication may produce a net taxable amount of about $1,000 on annual distributions of rental income, which will fall in the 10% bracket.  Taxing about 10-15% of gross income at a rate of 10-15% results in an effective tax rate much less than the topline 37% that can apply to UBIT exposed transactions.  

Of course, if you are investing $1M in a bunch of syndications, the amount and rate of tax may ramp up a bit.  Even then, the leveraged rate of return will outperform most comparable opportunities that do not use leverage.

Most people mistakenly think 37% of total income from a deal is taxed.  That is not the case.  

[Steve C.]

Thank you @Brian Eastman for the detailed explanation!!

[Bernard Reisz]

@Steve C. The determining factor regarding what type of self-directed account to establish is very seldom UBIT. In addition to great info provide by @Brian Eastman, following are some common fallacies encountered and, sometimes, widely disseminated.

• Qualified Retirement Plans (abbreviated to QRP and, for purposes of this post, includes "Solo 401k") are exempt from all UBIT. UBIT applies to all tax-sheltered vehicles. QRPs have an important - but limited - exemption for "real estate acquisition indebtedness" and, very importantly, that exemption is not always applicable.
• The tax rate on UDFI is 37%+. The effective tax rate will usually be far, far lower due to the way it UBIT is calculated. In fact, in many, many instances UBIT never materializes until the asset sale. If-and-when applicable to a sale, the tax rate that applies is the far lower cap gains rate, not trust rates.
• The key factor in selecting a tax-sheltered self-directed retirement account is UBIT. This is erroneous because (a) a non-compliant QRP can result in far more adverse consequences than UBIT liability and (b) UBIT coming from UDFI does not override the financial benefits of using an SDIRA to invest in real estate. 

There are a plethora of self-directed retirement account vehicles available, each of which has its place. It's just a matter of making well-informed choices to get the best results for yourself.

[Steve C.]

Thank you @Bernard Reisz for the info!

(b) UBIT coming from UDFI does not override the financial benefits of using an SDIRA to invest in real estate. 

I didn't understand this last part. Are you suggesting SDIRA can be more beneficial even with UBIT?

As you mentioned, this depends on the situation, but when will this be true?

For my personal situation, I think QRP (including solo 401k) makes sense for me when trying to invest syndication deals or to buy turn key properties.

[Bernard Reisz]

@Steve C. To provide tax benefits, and not tax penalties, a QRP has to be "Qualified." To be Qualified it must meet the definitions of the Tax Code in formation and operation. Having a set of IRS approved documents is only 1 small part of a plan actually being "qualified." Therefore, those for whom subscribing to get a set of IRS approved QRP documents would not result in a Qualified Retirement Plan may be better served by using an SDIRA. Of course, no tax is better than a little tax... but a little tax is better than a lot of tax. 

[Steve C.]

Thank you @Bernard Reisz for clarification. Makes sense!

[Brendan Bracken]

I read in a marketing book on eQRP that Self Directed IRA's are Not subject to the higher taxable rate for real estate investments involving the use of leverage/debt. Conversely, SDIRA's that invest in real estate where debt financing is involved requires the SDIRA account to pay out 37% tax rate on the profits. Is this true?

[Dan Cardone]

Question about Solo k - I currently have one with 5 properties leverage about 40%. Looking to convert the Solo k assets to a Roth Solo k over the next 2 to 3 years. I'm 52 with the goal of have the income tax free in retirement and then transferring the account after my wife and I are gone to our kids. Thoughts.....

Thanks

Dan

[Dmitriy Fomichenko]

@Dan Cardone, 

get together with your CPA to discuss and estimate your tax liability. 

[Percy N.]

@Dan Cardone, what you mention is possible, whether it is the best scenario for you or not is a discussion with your financial advisor.

Do you have non-recourse debt on the properties? That may have to change or be retitled. 

From what I understand, your solo-k plan can be written to have a Roth component as well.

Lastly, I see you are not too far from us, in case you want to connect over coffee one day.

[Dorothy Wulf]

Yes, my husband and I have EQRP’s. Highly recommend. You are the custodian or your own account. 

[Bernard Reisz]

@Dorothy Wulf Do and your husband have separate plans or a single plan in which you both participate? (Spouses can, in most cases, share a 401k plan, thereby reducing fees and paperwork burden.)