For many real estate investors, leverage is a key factor to their plans for profits – leverage in the form of mortgage financing. When you introduce mortgage financing into Self Directed IRA ownership of real estate, a special tax called Unrelated Business Income Tax (UBIT) is triggered. The tax often isn’t detrimental as will be covered in another post, but nonetheless it reduces the profit.
For the self employed, a fantastic development has occurred over the past few years – the Solo 401(k). One distinct advantage of the Solo 401(k) over an IRA is that it is not subject to paying UBIT on profits from financed real estate. Eliminating UBIT by using a Solo 401(k) eliminates the need to file a return (Form 990-T) as well as the accompanying tax. Sound pretty good so far?
The difficulty in recent times has been obtaining nonrecourse financing. The leader of NR financing in the Self Directed IRA industry for the past few years has been North American Savings Bank. Last year, they took the familiarity of IRA lending and applied it to Solo 401(k). Unfortunately for many Solo(k) investors, this has only been available to plans who choose to name a custodian as trustee of the plan. Qualified plans (which is what all 401k plans are) are different than IRAs in that they are not required by law to name a custodian (bank or trust company) as trustee of the plan assets. Investors who establish Self Directed Solo 401(k) plans that name themselves as trustee for simplicity have not been able to readily obtain mortgage loans for their Solo (k) plan from NASB.
Well, as of this month, NASB has expanded their loan products to include a nonrecourse loan program for self trusteed Solo 401(k) plans. I caught up with Matt Allen to discuss the great news on UNLIMITED RETIREMENT ACCOUNT® Radio. The skinny is that the program is almost identical to the IRA lending program. If you aren’t familiar with their guidelines, check out the URA Radio show podcast as it become available soon.
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Can you open and fully fund a Solo 401K in 2009 & 2010 and then roll the solo funds into a self directed ROTH in 2010 and 2011?
I know I will pay taxes but it looks like special contribution rules for Roth IRA will let me import “any” 401K funds as long as I pay the taxes.
Since I plan to not touch my roth for another 20 years that lets me get some solid growth while getting arround the maximun AGI and contribution limits in 2009 & 2010.
TH,
Yes Solo 401k funds can be rolled over into IRAs and/or converted to Roth.
I would strongly suggest against it though because (compared to non-Roth) the Roth IRA is more beneficial for the government and less beneficial for the taxpayer in an inflationary economy such as ours.
Jeff
Wouldn’t a better option be to roll the Solo401K into a RothSolo401K. Then open a new Roth IRA instead of rolling that money into it?
That way you can still take advantage of sheltering the larger amounts of money from your business the 401K’s allow and reducing your taxable income.
Will
Will,
I’m not really sure what two options you are comparing, but the Roth IRA or Roth 401k generally turns the tables to benefit the government more at the cost of the taxpayer. It’s a pretty slick trick, and I’m in the process of creating a report to help people understand it. I’ll post an update here when it’s available.
Jeff
I think I’m going to take a loan to complete this building because for now I do not have anywhere I can get money. The bank will give it to me, that I know and they will give me time to repay it.
Can you use a contract for deed as a non recourse loan instead of going thru a bank if a property is financed by the owner? Just want to make sure.
Good advice.