Do you know that you can invest in real estate using retirement plans? Do you know that the type of plan you invest with can mean the difference in thousands and thousands of dollars in returns? Get educated and learn the difference between the options available to you.
It’s Not How Much You Make But How Much You Keep
If you have an IRA, you can roll those funds into one of three different retirement vehicles, tax-free and penalty free to include;
- SDIRA – Self Directed IRA’s
- Solo401k’s
- QRP’s – Qualified Retirement Plans
Which option you choose will have a significant impact on the overall returns of your investments.
Most investors choose self directed IRA’s. I believe they choose this avenue because they don’t know or understand the difference.
UBIT Tax
There is a tax assessed within SD IRA’s but not within Solo401k’s or QRP’s. The tax is called a UBIT tax which stands for Unrelated Business Income Tax. The tax basically is assessed on any earnings within the SD IRA that relates to leverage. On real estate transactions, most deals will have a loan on the property between 70-80%, therefore 70-80% of the earnings will be subject to this UBIT tax.
Is the UBIT tax material?
In my opinion the tax is absolutely material and I believe investors should educate themselves as to their alternatives. Here is my understanding. Let’s assume an investor invests $100,000 into a real estate syndication using a SD IRA and the deal has a 75% loan on the property. Let’s assume the property is later sold and the investor doubles his/her equity. In this case 75% of the $100,000 gain will be subject to UBIT tax in the SD IRA, so $75,000. I’m told this tax rate can be as high as 37%. So 37% multiplied by $75,000 equals $27,750 in taxes that your SD IRA would be subject to paying.
Solo401k’s and QRP’s Are Not Subject To The UBIT Tax
Solo401k’s and QRP’s are not subject to the UBIT tax. Because of this, in my opinion it is much better to use one of these vehicles to invest retirement funds into real estate transactions.
Can I Do Something If I’m Already Invested With A SD IRA?
It is my understanding that yes you can take action if you have already invested using a SD IRA. It’s my understanding that you can setup either a solo401k or a QRP and then transfer the ownership interest from the SD IRA into the Solo401k or QRP if you do it before the sale of the property.
How do I learn more?
I recently interviewed Damion Lupo on the podcast and he discusses the benefits of using an eQRP or enhanced QRP. I believe you will learn about the various options available to you by listening to this podcast. Link below.
Disclaimer
Please seek counsel from your accountant, tax advisor and legal advisor. I am not a practicing CPA or tax advisor. I’m simply sharing information I have learned over the past several years.
Why do I share this story with you?
I share this because I want each of you to maximize your investment returns. Get educated on your options and then take action!
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