401(k) or Solo 401(k) Non-Recourse Loans are a great way to leverage your 401(k) funds to get a better return on your money. Financing the purchase or refinancing a purchase of real estate inside of a Solo 401K has some distinct advantages over using a Self Directed IRA to buy and fund real estate purchases. The process is the same no matter the retirement entity purchasing the property and funding it with a Non-Recourse Loan. However, the big advantage to the Solo 401(k) is that there is No potential UBIT, or Unrelated Business Income Tax on any of the profits made inside of the Solo 401(k) either from rental income or the gains from the sale of the property. When the rules were written for the different kinds of retirement plans, the Solo 401(k) got a great break in that it is exempt from Unrelated Business Income Taxes.
UBIT is not an onerous tax, and most real estate activities inside of a self-directed retirement plan where leverage is used do not actually incur much in the way of UBIT. But it can be a concern for those investors using leverage and the beauty of the Solo 401(k) is that issue is completely taken off the table. So when you are thinking of establishing that self-directed retirement entity that you are going to use to invest in alternative assets and particularly real estate, think about a Solo 401K. If that is an entity that you are allowed to use for your investing strategy for retirement it also has the advantage of the owner of the account also being the Trustee of the funds and therefore has complete control over the investing activities of the entity. That means there is no need to work through a Custodian or Administrator for any transaction the entity does. The Trustee of the Plan simply runs the entity like a separate business entity and as long as all the rules are followed, the Trustee has complete control over the activities inside the plan. That freedom from having to work with a large company to transact business makes the Solo 401K a great fit for independent minded investors who want to control their own financial destiny.