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Investing with a Self-Directed or Solo 401k after the IRA conversion explained.

First, what is the UBIT tax?

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 a 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.

Mark Nolan
Compliance Officer
My Solo 401k Financial – Grow. Control. Direct.

 

What are the tax implications if I invest using my solo 401K?

In a Multi-Family Syndication, if you are investing in a non-active business (like a Multi-Family Building) as a passive investor managed and owned by someone other than you, this would not be subject to UBIT tax. You should always enlist the advice of a qualified tax attorney.  But, for the purposes of this specific investment, your good to go. Keep in mind that distributions and or gains would need to be reinvested or distributed directly to the Solo 401K that originally invested in the syndication to comply with all IRS tax rules.

As a Limited Partner/Investor, below is an example of what this might look like:

If you are a self employed individual that does not have employees and does not receive a W-2 from another employer, then you have the option to transfer your existing IRA to a Solo or Self Directed 401k using Mysolo401k.com.  We recommend this company because they are priced well and are extremely knowledgeable in this area. Once you convert your IRA to a solo or self directed or solo 401k, you can invest in a multi-family syndication as a passive investor and be listed on the LLC of that syndication as a limited partner. There is no cap on what you can invest. There is a lot of confusion on this and it relates to taking a business loan from your 401K. Do not confuse the two. This is a passive investment in a non-active entity and is not subject to UBIT if invested properly.  Also, this multi-family syndication investment does not have to be paid back to the 401K like a loan option. A normal loan from your 401k would constitute a possible UBIT, penalties, and/or a required payback period of 5 years with some interest. Taking a loan on a 401K and using it to build your own home, to flip houses regularly or to invest in a shoe store are examples of where using your 401k to fund these projects could subject you to these types penalties, fees and UBIT.