All Forum Posts by: Mark Nolan

@Justin R.

Whether your own a 1% or less than an 50% interest in an LLC does not matter, as the rules do not allow the IRA participant to loan his or her solo 401k funds to an LLC that you own an interest in. On the other hand, the rules (2017 rules as they may change in the coming years do to a pending bill to change the aggregate to 10%) generally do allow for investing one's fund in an LLC that you already own an interest in provided you are not an employee of the LLC and the ownership percentages in aggregate stay below the 50% threshold.

@John Klaus

Yes the rules allow the IRA participant to manage property owned by the IRA provided you do not receive compensation. This is often the case with an IRA LLC since the manager of the LLC is the IRA participant. Another common retirement vehicle that is often used to invest in real estate is a solo 401k where it is also common for the solo 401k trustee (typically the business owner) to manage his or her real estate investments but does not receive compensation for doing so.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions;
• Both are prohibited from investing in assets listed under I.R.C. 408(m); and
• Neither may be invested in your own business.

The Self-Directed IRA and Solo 401k Differences

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
• When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

@Shane M.

To learn about the self-employment income requirement, see the following. 

https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

@Casey Mericle

No as that would result in one IRA not fully benefiting from its investment. What is more, if we are talking about one of the IRAs being a traditional IRA and other being a Roth IRA and the Roth IRA is the one that benefits the greatest do to the traditional IRA investment, it could make it even more problematic.

@Kathy Patterson

With respect to RMDs, if the account does not have enough cash to cover the RMD, part of the property (enough to satisfy the RMD amount) can be distributed in-kind to you.

@Derek Bennetsen

See the following for rules regarding UBIT and UDFI.

https://www.irs.gov/charities-non-profits/unrelated-business-income-tax

https://www.irs.gov/irm/part7/irm_07-027-008.html

Unrelated business Income Tax

The Unrelated Business Income Tax (UBIT) is assessed when a tax-exempt entity, such as an IRA or solo 401k plan, engages in a business activity that is not related to its general purpose. For example, if a self-directed solo 401k account is used to purchase a shoe store, the income generated from the business would be subject to UBIT. Reason being, selling shoes is no the general purpose of an solo 401k plan. This tax was created to keep tax-exempt entities on a level playing field with non-tax-exempt entities such as solo 401k plans and IRAs.

Unrelated Debt-Financed Income

Similar to the UBIT, there is a another tax called the Unrelated Debt-Financed Income () tax on IRA investment income derived from debt-financed property, proportionate to the debt on the property. HOWEVER, UDFI does not apply to solo 401k plans so this is why individuals prefer solo 401k plans over IRAs for investing in real estate whereby a none-recourse loan will be used.

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