WTH do I do with my SD401K Cash? Post-Ubit are the SD accounts worth the trouble?

[Sandy Blanton]

I love having lots of cash in a retirement account, safe from creditors and bankruptcy. But after learning about UBIT, i'm unsure what to do. Ideally at this time I'd like to flip. We're earning 200% annually cash on cash return on our flips (outside the retirement account). From what I'm hearing it's not worth doing them inside an SD account? It seems the safe/best? activity for SD funds is doing hard money deals for others. But, we can't make more than 20% apr on these deals.

Steven Hamilton II please share your infinite wisdom on this. Thanks folks:)

[Jon Klaus]

Sandy, what if you were to do the occasional flip with these funds? Less than the threshold that would trigger UBIT. We read in another thread that number might be three per year.

Is that not enough? You could do high end rehab/flops or new construction.

Still not enough? Accept less return in exchange for tax deferred gain. What if you only earn 40-50% CoC annually, rather than 200%? Pencil it out for 2-3 decades and see if the results meet your needs.

Or ask Mitt Romney if creative and complicated uses are worth it in your SD IRAs.

[Loren Whitney]

Hey Sandy,

UBIT shouldn't necessarily be seen as a bad thing. Are you leveraging your retirement now to increase purchase power and strive for higher returns? Do some math and see how your flip opportunities with UBIT compare to non-UBIT opportunities.

Many SDIRA professionals and tax specialists will tell you that Fix/Flip investments are considered 'operating business' transactions and therefore subject to UBIT. While I agree with this statement from a general IRC perspective - try to find someone that reports UBIT on their cash-only fix/flip to the IRS. Does anyone report UBIT on their Fix/Flips when paying cash?

Here is something to look into Sandy - Individual 401K Plans. In many situations, a 401K is exempt from UBIT and becomes very appealing. Do some research and see if this platform suites your needs.

Jon Klaus - Mitt probably didn't start with IRAs but other qualified plans.

Merry Christmas Guys!

[Joffrey Long]

Sandy,

I agree with Loren. People get overly upset about UBIT, and for the money you stand to make on flips, go for it.

The most important thing, in my opinion, is to follow all the other little rules about self directed IRAs.

For some of your IRA/401k funds, consider investing in trust deeds, in whatever area you are in. Not as exciting or profitable as flips, but will give you some higher returns, and first trust deeds provide a somewhat safer way to get higher returns.

It's too early in the morning for me to work a clever "Mitt" comment into this, but I think Jon and Loren handled that pretty well!

Joffrey

[Chris Weiler]

Sandy, I will second the idea of using an SD 401K rather than a SD IRA. They are less restrictive, you don't need a custodian (fees and hassle) and they are not subject to leverage based UBIT.

Here is a possible solution for you. If someone else does the flip and your IRA/401K provides the capital for it your transaction may be exempt from UBIT. You could charge interest and contingent interest (% of profit). Since interest is exempt from UBIT, you may be able to do your short term flips without a tax consequence. If you go this way, just make sure you are not providing funds for a prohibited party (you, your spouse, ancestors and lineal descendants, etc.)

[Bryan Hancock]

Who cares if you have to pay UBIT? That is the tax tail wagging the dog. Making more money is good even if you have to pay more taxes.

I like the solo K as the best tax deferred vehicle....for my situation at least. The Nabers Group and Sunwest Trust are good options here.