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Solo 401(k) Contributions, Real Estate Investing and more | Client Q&A

AdMail Podcast

In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about Solo 401(k) contributions, the UBTI tax in a real estate investments, and Solo 401(k) requirements for those with multiple owner-only businesses.




Question 1 from Jaime K in Nashville, TN: Do I have to make contributions to a Solo 401(k)?

The simple answer is no, you do not need to contribute to your Solo 401(k). All contributions are elective and can be made or not, depending on your financial situation. It’s up to you when and how much you contribute. Of course, you can only contribute a certain amount each year, based on the limits set by the IRS and your earned income.

For 2020, the maximum contribution you can make to a Solo 401(k) is $57,000 or $63,500 if you are at least age 50. Of that, $19,500 can be made as an employee ($26,000 if age 50+). The rest is made as the employer, based on a percentage of your self-employment income. Of course, you must have enough earned income to contribute up to the maximum. If you made $20,000 from your business, then that is the maximum you can contribute. You cannot exceed either of these limits.

Of course, you don’t have to contribute the maximum amount. Solo 401(k) contributions are not obligatory. Therefore, it’s up to you to decide how much you contribute in a given year. Obviously, the more you can put away, the better off you will be in the long run.

Question 2 from Donna R in Charleston, SC: If I invest with a Self-Directed Roth IRA in a co-venture real estate deal with a friend, and we get a nonrecourse loan for the real estate, will I still be subject to the UBTI tax?

Let’s break down this complex question into multiple parts. The first thing to figure out is if the joint venture is a prohibited transaction. Since the co-investor is a friend, and not a disqualified person, you are allowed to make an IRA investment together.

Next, comes the UBTI application. When you borrow money for a real estate investment in an IRA, it must be a nonrecourse loan. You cannot personally guarantee the loan, therefore it must be nonrecourse, meaning only the property can be gone after in case of default and not any other assets in the IRA. The debt-financed portion of the property will be subject to the UBTI tax. For example, if you borrowed 30% of the value of the property, 30% of your share of any income generated would be taxable. However, this only applies to your IRA investment. Your friend’s profits are not subject to the UBTI tax.

Lastly, even though the investment is made with a Roth IRA, the UBTI tax is still taken from the plan. There’s a double tax whammy there. Since Roth IRAs are funded with after-tax money, the UBTI will tax that amount again. Obviously, the more you borrow, the more you have to pay in taxes. You must consider this when you decide on an investment. Sometimes the UBTI tax may be worth the investment, others, not so much!

Question 3 from Jake B in Omaha, NE: If I own two businesses, 100% with no employees, and want to set up a Solo 401(k) plan, do I need to set up one or two plans?

Even though you have two separate businesses, you only need one Solo 401(k) plan. This is because of the controlled group rules. They state that if you own 80% in two or more businesses or you have affiliated businesses, they can utilize one 401(k) plan or other benefits. Therefore, even if your businesses are totally different in nature, you only need one plan, since you own more than 80% of each them. There’s no need to set up two different plans, and the costs associated with them.

The great thing about this is you can aggregate your income to contribute the maximum allowable to one plan. If one business makes $15,000 and the other makes $85,000, the entire $100,000 may be considered for contribution purposes.

The only time where this could give you issues is if you had employees. You would not be able to set up a plan for one business and exclude the other business from the plan. Therefore if Business A had 20 employees and Business B employed only yourself and a spouse, you cannot create a 401(k) plan for Business B without including all the eligible employees of Business B. Since Jake has no employees, this is not an issue.

AdMail – Keep it Coming

We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].

As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!

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