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The next unique benefit of the solo of 401k is the exemption from UDFI.
When IRA invests in real estate and uses mortgage financing for leverage, it creates unrelated debt finance income. This is a type of unrelated business taxable income and unrelated business income tax becomes due. So, the income of the IRA is tax, and the gains of the IRA when the property is sold are also tax. Qualified plans are exempt from UDFI related tax, 401k is a qualified plan.
The next unique benefit of the solo 401k above and beyond the self directed IRA is a participant loan feature. Each participant can take a participant loan from their account assets. The maximum loan amount is 50% of the account value or $50,000.00 whichever is less. The maximum term is 60 months or five years and the minimum repayment frequency is quarterly. I suggest anybody who does a participant loan, set it up for monthly repayment so that they don’t have to remember whether or not they have a payment each month that’s just every single month there is payment.
Now, the interest rate for a participant loan is a primary plus one. This actually just changed two days ago primary it was 4% I believe it’s 3.25% now by the time it is recording so the actual interest rate for a participant loan that set up today would be 4.25%. Of course the interest rate is of not much consequence when you’re borrowing money and paying it back to your own retirement account. It’s not like having a true cost of a loan by paying interest to a third party such as a bank or another lender.
Now, this loan can be taken for any reason, now only one loan can be out extended at anytime so if you took a $10,000.00 loan because that’s all you thought you needed for whatever your situation was and then you decided, “Gosh, I need to max it out or I need the other 40,000.” You will have to pay back your participant loan first and take a new participant loan subsequently $450,000.00.
The next unique benefit to the solo 401k above and beyond the IRA is there is no restrictions on that raw of component. That blue square right there, that piece of the contributions, it doesn’t matter how much money you make. With an IRA, if you earned over a certain limit, you are not allowed to participate in a Roth IRA. You are not allowed to contribute to a Roth IRA, you are not allowed to re-characterized traditional IRA’s to Roth IRA’s. And with the solo 401k, you’re just simply are now in conversations on who can contribute to the Roth sub-account.
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