Solo 401k Plans v Self Directed IRAs

[Conner Parsons]

Hello BP Community,

I am looking to do my first property flip, but am needing to get a little creative on the financing side due to minimal cash on hand. Although my liquidity is limited, I do have a decent amount of capital sitting in retirement accounts. Consequently I have been looking at a Self Directed IRA as a means to fund my flip. Just as I was thinking this is the route to go, I read about the Solo 401(k) plan and found that it is exempt from UDFI (and consequently UBTI) resulting from the financing of the asset. A few questions regarding the Self Directed IRA and Solo 401(k):

-Am I eligible for a Solo 401(k) if I do not yet have any self-employment income? I am currently employed full-time, and have not yet begun generating income from real estate.

-I have read conflicting accounts on whether the proceeds from the sale of real estate in a Self Directed IRA and/or Solo 401(k) are subject to UBTI. To be clear, is sale of real estate considered 'business income' or 'investment income'? Based on what I've read, business income IS subject to UBTI and investment income IS NOT subject to UBTI. Not sure if this is accurate or not...

Any clarification you could provide on these topics would be greatly appreciated!

-Conner

[Dmitriy Fomichenko]

Conner,

if you are personally considering making investments - you can't use your retirement funds for that (IRS rules don't allow that). If you set-up self-directed IRA or 401k - your retirement plan can make investment on it's own, without your personal involvement (again, not allowed by the IRS rules). You must understand the UBIT impact if you consider flipping in your IRA.