Unrelated Business Income Tax (UBIT/UBTI) Facts and Definition: Solo 401k | Self-Directed 401k

UBIT  Applies to both IRAs & Solo 401k Plans

Since retirement accounts such as IRAs and 401k plans are tax deferred arrangements (i.e., are not subject to federal or state taxes until distributions commence, usually when the participant retires) and can be invested in businesses, they are in direct competition with non-retirement account investors that also invest in active  businesses and in turn pay capital gain taxes. This is seen as disadvantageous to tax-paying businesses and investors who invest non-retirement funds. To level the playing field, the IRS requires IRAs and 401k plans that purchase equity in an LLC or Limited Partnership, for example, to  pay UBIT on net income generated from the investment  if the business is deemed  an active business vs a passive investment business. For example, a Solo 401k that generates net income from investing in a shoe store will be subject to UBIT because the shoe store is considered to engage in active business activity instead of passive investment activity.

Another Type of Tax Known as UDFI Applies to IRAs but Not to Solo 401k Plans  

As described above, while tax deferred accounts such as IRAs and solo 401k plan are generally subject to payment of UBIT if they purchase equity in an entity that is deemed to offer goods or services, another tax known as unrelated debt finance income (UDFI) only applies to IRAs not to solo 401k plans. Debt financing comes into play when a solo 401k or IRA uses borrowed funds in conjunction with funds in the retirement account to invest in physical real estate. 

UBIT/UBTI Facts for: Solo 401k | Self-Directed Solo 401k | Self-Directed 401k

  • UBIT May apply to both IRAs and Solo 401k plans that purchase equity in an LLC or Limited Partnership, for example.
  • UBIT is paid only on income of $1,000 or more from a trade or business
  • UBIT is reported to the IRS on Form 990T, Exempt Organization Business Income Tax Return.
  • UBIT falls under IRC Sec 511, and exceptions are found in Publication 598, Tax on Unrelated. Business Income of Exempt Organizations.
  • UBIT must be paid with Solo 401k funds not personal funds.

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 20 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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