American IRA Discusses How to Understand UBTI in a Self-Directed IRA

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Unrelated Business Taxable Income (UBTI) is important to understand, even for those investors with a Self-Directed IRA. American IRA in North Carolina recently took to the company blog to explain.

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American IRA CEO, Jim Hitt

A Self-Directed IRA can be used as a way to lower overall tax burden

The concepts of taxation within a Self-Directed IRA are fairly straight forward. They are consistent with any other similar type of retirement account. The Self-Directed aspect of these IRAs simply allows investors to choose the assets they like—so long as those assets are allowed by the IRS. But a recent post at American IRA recently dove deeper into tax considerations by explaining UBTI, or unrelated business taxable income.

Said the post: “Whenever a tax-exempt or pass-through entity, such as a Self-Directed IRA, owns a business or uses borrowed money, unrelated business taxable income, or UBTI, may come into play.” This tax would then apply to the gains/profits realized during the tax year that may be attributable to the leverage in the investor’s account. For example, this can apply to real estate investments.

If a Self-Directed IRA owned a business and used leverage to increase profits, it would then have to pay taxes on the income that come from this leverage.

The article notes that the Self-Directed 401(K) Plan does not leave the investor liable for this tax.

“These tax considerations can seem a little heavy at first,” admits Jim Hitt, CEO of American IRA. “But the thing to remember is that these are not separate tax issues because of Self-Direction. In fact, these same taxes are applicable to anyone who has this kind of situation. These taxes cannot be avoided, which is why it is so important that investors know them and understand them. In the case of UBTI, it is especially important that investors understand how taxes might work with the use of leverage.”

A Self-Directed IRA can be used as a way to lower overall tax burden, especially through tax deferral or paying taxes up-front, as in the case of a Self-Directed Roth IRA. But that does not mean that a Self-Directed IRA will knock out every tax.

For more information on UBTI, visit the post at American IRA’s website: Interested parties can contact 866-7500-IRA.

American IRA, LLC was established in 2004 by Jim Hitt, CEO in Asheville, NC.
The mission of American IRA is to provide the highest level of customer service in the self-directed retirement industry. Jim Hitt and his team have grown the company to over $400 million in assets under administration by educating the public that their Self-Directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more.

As a Self-Directed IRA administrator, they are a neutral third party. They do not make any recommendations to any person or entity associated with investments of any type (including financial representatives, investment promoters or companies, or employees, agents or representatives associated with these firms). They are not responsible for and are not bound by any statements, representations, warranties or agreements made by any such person or entity and do not provide any recommendation on the quality profitability or reputability of any investment, individual or company. The term "they" refers to American IRA, located in Asheville and Charlotte, NC.

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