The Most Elusive & Dangerous Self-Directed Solo 401k Practice – Part 2

November 18, 2010 By 8 Comments

[Originally Published at JeffNabers.com]

In the last post, you learned about how doing an active “entrepreneurship-ish” deal inside your Solo 401(k) is an open invitation for the IRS to tax the hell out of you.

In this post, you’ll learn the solution.

  • The solution is not to avoid doing active deals.
  • The solution is not to stop pursuing massive profits or to lock away your talents and skill to be unused.

The solution is to structure both your active entrepreneurship and your passive investment activity in a way that that puts you in the most control. Put another way, avoid giving the IRS an open invitation to tax attack you.

I bet you can guess where this is going (one commenter had a pretty good [Read more...]

Filed Under: Blog, Solo 401k Compliance, Solo 401k Contributions, Solo 401k Investment Options & Ideas, Solo 401k Maintenance, Solo 401k Participant Loans, Starting a Business, UBIT/UBTI/UDFI Taxes Tagged With: economy, investing, investments, real estate, recession, self directed ira, self directed solo 401k, solo 401k, solo k

The Most Elusive & Dangerous Self-Directed Solo 401k Practice

November 16, 2010 By 10 Comments

[Originally published at JeffNabers.com.]

There’s something that most “successful” Self-Directed Solo 401(k) investors do that can spin them out of control and get them into trouble.

I say “successful” in quotation marks because I’m talking about the particular kind of Self-Directed Solo 401(k) success that is sexy enough to be frequently written about.

What is this dirty deed that leads to massive profits and the potential implosion the very same Self-Directed Solo 401(k) that got those profits?

Entrepreneurship.

Bad Entrepreneur!

Yep. Entrepreneurship is so powerful that it seems to be the source of all aggressive wealth creation. So where’s the danger?

Let me explain. Some of the most [initially] profitable Self-Directed Solo 401(k) stories sounds something like this…

Joe, a Self-Directed Solo 401(k) investor, knows how to work real estate deals into profits. So he buys and sells real estate in his Self-Directed Solo 401(k). Sometimes he involves bank financing. Sometimes he involves private financing and partnering.

But one thing is for sure: Once Joe purchases a property, the work has just begun. He has a system. He only buys properties that meet a certain criteria. After the closing, he usually has repairs and/or remodeling work done.

And his system works. He’ll put $30k or $40k of his Self-Directed Solo 401(k) money into a deal and get $80k to $100k out, often less than a year or two later.

First, applaud Joe for [Read more...]

Filed Under: Blog, Solo 401k Compliance, Solo 401k Contributions, Solo 401k Investment Options & Ideas, Solo 401k Maintenance, Starting a Business, UBIT/UBTI/UDFI Taxes Tagged With: business, economy, individual 401k, investing, investment, real estate, recession, self directed, self directed ira, self directed solo 401k, solo 401k, solo k, startup, UDFI

Unrelated Business Income Tax – UBIT for Solo 401(k) & IRA accounts

February 19, 2009 By 6 Comments

If you talk to the average CPA, he’ll tell you that UBIT is the boogeyman and is to be avoided… always. Discussing this topic with an above average CPA (such as Eric Wikstrom of Integrated Wealth Strategies) yields different advice.

The Two Types of UBIT

  1. Triggered from a trade or business – if a tax exempt entity (such as an IRA or 401k) owns a trade or business, the income of that business is taxed at trust rates (i.e. very high tax rates). Both IRA & Solo 401k accounts are subject to this type of UBIT.
  2. Triggered from ownership of leveraged real estate – if a tax exempt entity (including IRA) owns real estate leveraged with a mortgage loan, the portion of that income attributable to the mortgage loan is taxed at trust rates. This type of UBIT is specifically referred to as UDFI – Unrelated Debt Financed Income. Solo 401k accounts & other qualified plans are exempt from UDFI.

Trust tax rates are very high, so it might make sense to avoid Type 1 UBIT at all costs. On the other hand, a close examination of UDFI tends to revoke its “boogeyman” status.

The reason UDFI isn’t a detrimental cost is that non-recourse mortgage loans (the only type an IRA/401k can legally obtain) are typically only offered at a 65% loan-to-value maximum. So this means that the UDFI tax is only payable on up to 65% of the property’s net income. (That’s right – net income. You do get to deduct depreciation and other expenses before paying UDFI tax).

Let’s examine a simple comparison of the taxes payable on net real estate income with 50% leverage: [Read more...]

Filed Under: Blog, UBIT/UBTI/UDFI Taxes Tagged With: 401k, ira, leverage, mortgage, real estate, self directed, tax, taxation, taxes, UBIT, UBTI, UDFI, unrelated business income tax, unrelated business taxable income, unrelated debt financed income