any type of loan. If there’s an emergency and you’re forced to tap into your SEP IRA, you’re taxed on the distribution as if it were income and penalized 10 percent if you’re under 59.5 years old. Finally, one of the least known benefits is that the 401(k) is exempt from UDFI (unrelated debt financed income tax), and the SEP IRA is not. Very few people are aware of this tax, but allow me to illustrate how it works. Imagine buying a property in your SEP IRA for $100,000. In this exam- ple, we’re using $50,000 cash and $50,000 in the form of a nonrecourse mortgage. Imagine that through some fortuitous set of circumstances you’re able to immediate-
ly flip the property for $130,000. Because your $30,000 profit wasn’t entirely engen- dered from your IRA, the percent of the purchase price that was financed is subject to this UDFI tax at the trust tables rate. In short, instead of netting a $30,000 profit, you make about $19,812. If you did the exact same deal in a 401(k) with the exact same nonrecourse mortgage, you would’ve netted the entire $30,000 amount. While it’s too late to open a 401(k) and contribute for 2016, it’s not too late to start the due diligence process of deter- mining whether you would benefit from a 401(k) in 2017. Remember, most investors spend much of their time analyzing a deal
without giving enough consideration to the type of entity they should be using to make the investment. If you’re interest- ed in a tax deduction, loan provisions, tax-advantaged growth and no tax on your leveraged real estate, the 401(k) might be the tool you need to help reduce what you’re paying Uncle Sam. •
Tyler Carter is director of business develop- ment for NuView IRA, a Florida self-di- rected IRA administrator. He has 10 years’ experience in the financial services industry,
holds Series 7 and 66 licenses and is passionate about alternative investments of all types. For more informa- tion, contact NuView IRA at 407-716-3636.
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