A Self Directed IRA offers individual investors a number of significant tax and investment advantages. However, unlike a Solo 401K Plan, an IRA holder may not borrow anything from his or her IRA, whereas, a Solo 401K Plan participant can borrow 50% of his or her account value or $50,000 and use that loan for any purpose. This one feature that makes the Solo 401K Plan so attractive to investors looking to use retirement funds for personal or business purposes. In sum, an IRA holder can not take any Self Directed IRA loans but the IRA can take a Self Directed IRA loan as long as the loan in non-recourse.
An IRA, however, is permitted to use non-recourse leverage for investment purposes. In other words, an IRA can borrow or take a loan and use those proceeds for a real estate or other investment. The loan must be non-recourse – meaning the individual plan participant cannot personally guarantee the loan. The lender would have to take a security interest in the property as its sole security for the loan.
Pursuant to Internal Revenue Code Section 514, if an IRA uses debt to acquire real estate, the debt-financed portion of the property is treated as unrelated business taxable income (“UBTI” or “UBIT”). The UBTI tax rates mirror the Trust tax rates, which is approximately 35%. However, in the case of a 401K or Solo 401K Plan, non-recourse leverage may be used without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Solo 401(k) Plan versus a Self Directed IRA to purchase real estate.