UBIT and UDIF Differences

As a general rule, UBIT applies to both IRAs and solo 401k plans; however, UDFI applies to IRAs but not to solo 401k plans.

Unrelated business Income Tax

The Unrelated Business Income Tax (UBIT) is assessed when a tax-exempt entity, such as an IRA or solo 401k plan, engages in a business activity that is not related to its general purpose. For example, if a self-directed solo 401k account is used to purchase a shoe store, the income generated from the business would be subject to UBIT.  Reason being, selling shoes is no the general purpose of an solo 401k plan. This tax was created to keep tax-exempt entities on a level playing field with non-tax-exempt entities such as solo 401k plans and IRAs.

Unrelated Debt-Financed Income

Similar to the UBIT, there is a another tax called the Unrelated Debt-Financed Income (UDFI) tax on IRA investment income derived from debt-financed property, proportionate to the debt on the property. HOWEVER, UDFI does not apply to solo 401k plans so this is why individuals prefer solo 401k plans over IRAs for investing in real estate whereby a none-recourse loan will be used.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 18 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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