No UBIT in Solo 401(k)

Is there Unrelated Debt Financed Income (UDFI) in a 401(k)? No there is not. It makes the Solo (k) the perfect vehicle to use when financing real estate in your retirement. The 401(k) incurs no tax when borrowing to buy real estate.

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No Debt Financed Tax in a Solo 401(k)

Another enormous advantage to the solo 401(k) is the fact that there is no UDFI or unrelated debt finance income. That’s a big long phrase for, basically, if you finance property in a retirement account, the portion that is financed– whatever, let’s say it was 60%– that portion of the profits is earned by non-IRA money, therefore it’s treated differently. It stays in the retirement plan, it stays in the IRA, but it is taxed but the portion earned with IRA money is not taxed. The portion earned with non-IRA money is taxed and it can be quite expensive– and there’s a bookkeeping hassle. But in the 401(k) program– that just goes away, it’s just eliminated. So even if you finance 99% of the property, all of the profits stay in the IRA, or in the retirement plan, just like the IRA, except none of it’s taxed, not until it’s taken out as a distribution. Its great for leveraging real estate, it’s really the answer if you’re a real estate investor. There is no unrelated debt finance tax in the solo 401(k).