UDFI – Unrelated Debt Financed Income — The name of my new band. Seriously though, this is one of the important reasons why, if possible, you should opt for a self-administered 401k over an IRA.
Transcript: Hi, this is John Park with PGI Self-Directed and contributor to BawldGuy Talking. Today’s topic UDFI, now before you wonder what in the heck I just said and I may not even know what I just said, let’s talk about what is stands for. UDFI stands for Unrelated Debt Financed Income, and it’s a difficult concept for a lot of people to understand. We are just going to really try to keep it simple today. By keeping it simple and I would say this with anything you always want to make sure you review things with your tax and legal professional. UDFI is a great benefit as it relates when we are comparing an IRA to 401K. What is it? Think of in simple terms. Let’s say your IRA had $50,000 and I was going to go out and purchase a property for $100,000, and I wanted to borrow funds whether it would be from an institution or from another person but it was leveraging other funds for that investment. Let’s say then you sold the property and I am going to use simple terms here again for $200,000. That profit now you just generated from those leveraged funds, the IRS will have taxation that they are going to say is due to them because you made profit on leveraged funds. That’s one huge disadvantage to investing in real estate with your IRA with leveraged funds. Now in contrast to that, UDFI if properly structured within a 401K that same example I gave you in most cases the 401K will not incur any additional taxes as long as the investment is structured correctly. It shows again one of the benefits of a self-directed or self-administered 401K plan that you don’t have with the self-directed IRA. Again, anything with 401K, you have to qualify for it. I have talked about that plenty a times. If you qualify for it and especially if you are wanting to leverage funds with an investment, you really want to think about the 401K versus the IRA and just remember UDFI. Thanks and this is John Park, PGI Self-Directed, look forward to seeing you next time.