Investing with a Roth IRA or a Roth 401(k)

[Diane Kennedy]

I got this question from a new client at USTaxAidServices and thought it was a great one.

In this case, they have both a Roth IRA and a Roth 401(k). They plan to use the funds to buy real estate. Does it matter which one they use?

I should add that they already know that they need to have an IRA LLC set up. This is different than a regular LLC and unfortunately there are some promoter types out there who dont' know the difference. Be very careful here - you MUST have special language in the LLC to qualify as an IRA LLC. Calling it a 'checkbook IRA' does NOT qualify. You could face penalties of 50% or more.

Anyway, off that rant... does it matter which pension funded LLC they use?

Yes. If you plan to use financing with the property, there will be an extra tax called UBIT (Unrelated business income tax) that is based on the gain that comes from the financing. So, figure you make $20,000 on a property and half came from the IRA funding and half came from a loan. $10K of it (half) will be taxable to the LLC at the MUCH HIGHER trust tax rates.

That's only if you're using a regular IRA - SEP, Roth or some other form of IRA. The Roth 401(k) (or any other kind of 401(k) for that matter) does NOT have UBIT. That can make a huge difference.

[cgreen]

Is there any difference in a Roth Solo 401(K) and a Roth 401(K)? I thought that there was no UBIT in the Solo 401(K) Plans..am I incorrect?

[Diane Kennedy]

Wow - just caught a mistake in my initial post. Thanks for pointing it out.

The Solo 401(k) plans - Roth and otherwise - do not have UBIT. All IRAs do - Roth and otherwise.

Sorry for the misleading original post.