If I create a solo 401K plan and it invests in a promissory note that pays interest and I get a 1099-INT, does the 401K plan need to pay taxes on that interest? Let’s say I invest $100K in a note that pays 10% interest and I get a 1099-INT for $10K. Let’s say the tax liability for that is $4K. Then does the 401K plan need to pay $4K in taxes?
ANSWER:
UBIT does not apply to interest earned on a promissory note investment. Also, Because a solo 401(k) is a tax-sheltered vehicle, note payments will continue to grow on a tax-deferred basis and taxes are paid once solo 401k distribution commences, generally at retirement age or once required minimum distributions (RMD) begin.
