What is UBIT? Is it only for SD IRA?

Question

Most of my RE is invested through my Self Directed Solo 401k.

I've seen the term UBIT thrown around, but don't fully understand it. I don't think it affects my  life, so that's good but I want to know about it anyway.

Tagging @Dmitriy Fomichenko who seems to know everything...

Dmitriy Fomichenko · Answer

Mindy,

UBIT stand for Unrelated Business Income Tax and applies on any income in your 401k that would derive from active trade or business. Passive investments (rental real estate, trust deeds, tax liens, private business, private lending, etc.) would be exempt from this tax.

Example of active trade or business would be: franchise business owned in by your 401k, flipping done in your 401k.

In an IRA UBIT would also apply on income from leveraged property, but the 401k is exempt from this.

Here is more on this subject from the IRS:

https://www.irs.gov/charities-non-profits/unrelate...

Marshall Hooper · Answer

i'm under the impression that a Solo 401k is for those who are self-employed? if you mean a loan from my companies 401k, then it would be a good idea, but my employer is a french-start up and they are still learning what it means for Americans to have to save for their own retirement. :)

Daniel Dietz · Answer

Thanks for the clarification guys. I cant imagine learning all this without all of your help and patience!

Dan Dietz

Dmitriy Fomichenko · Answer

Dan, I meant exactly what I wrote: In an IRA Unrelated Business Income Tax will apply on income from leveraged property. Such income would be called Unrelated Debt Finance Income (or UDFI). But the tax that the IRA would owe on UDFI is still UBIT.

Daniel Dietz · Answer

Dmitriy, it this last part of your answer, do you mean UDFI instead of UBIT, or am I misunderstanding?

I dont want others to be confused as taxation in Self Directed accounts is confusing enough already ;-)

Thanks for all you, and other plan providers on here also, do for the BP Community.

Dan Dietz

Justin Windham · Answer

Both IRAs and Solo 401ks can be subject to UBIT on business activity and UDFI tax on debt leveraged assets. The Solo 401k is exempt from UDFI tax only on real assets.

George Blower · Answer

@Marshall Hooper

That is correct regarding the solo 401k plan. Yes you could also borrow from your existing employer's 401k plan if the plan allows for it.

George Blower · Answer

@Marshall Hooper

One option is to take a solo 401k participant loan and use those funds for any purpose including investing them in your own LLC, since once borrowed, the funds are no longer considered solo 401k funds.

Dmitriy Fomichenko · Answer

@Marshall Hooper,

Yes you are correct, there are no loopholes for you to personally benefit from the use of your IRA funds. That is a defenition of a "Prohibited Transaction" and will result in disqualification of your IRA.

You are considered to be a "Disqualified Person" to your IRA. As such you must personally stay away from those transactions as far as possible. This is called "arms length".

You can learn more here:

https://www.irs.gov/retirement-plans/plan-particip...

Marshall Hooper · Answer

I guess that means there's no loophole allowing me to loan money to a LLC that I own instead? Or may loaning to someone else to his partnering with me on a deal?

What is UBIT? Is it only for SD IRA?

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