As tax season rolls around each year, we typically get a lot of questions about tax filing requirements and where to find a CPA who can help.

The simple answer is that most self-directed IRA and Solo 401(k) investors will not have any April tax filing obligations.

But does that mean you don’t need a CPA on your team?  The answer is, “it depends”.

Let’s take a look at tax matters associated with a self-directed retirement plan and where you might want some guidance.

Tax Filings Are Not Normally Required

A self-directed IRA is still an IRA.  So, if an IRA at Fidelity or E*Trade does not have to file a tax return, neither does a self-directed IRA, right?  For the most part, that is true.

The only tax implications normally associated with an IRA are the ability to take a deduction for any contributions you make in a given tax year or the need to report as taxable income a distribution to yourself from a tax-deferred IRA.  In either case, the reporting is done on your personal tax return.

Likewise, with a Solo 401(k) any contributions or distributions are reported on your personal or business tax return, and the plan does not have its own return to file in April.

Unlike a conventional IRA invested solely in stocks, funds, and other publicly traded financial products, a self-directed plan can invest in ways that do produce some taxable income.

Tax On Business Activities

When a tax-exempt entity like an IRA, 401(k), church, non-profit organization, etc. engages in a trade or business separate from its specifically exempted mission, the income from that business is taxable as Unrelated Business Taxable Income (UBTI).

Investments that can create UBTI include:

• Repeated flipping or wholesaling of houses
• Real estate development for immediate sale
• Hotels and some short-term rentals
• Income from an operating business like a restaurant, car wash, retail store, etc., if the business is not formed as a subchapter C corporation.
• Cryptocurrency Mining or Staking

Basically, if an activity would be considered earned income or regular income in the after-tax world, it probably generates UBTI for a retirement plan.

Passive investments that generate interest, dividends, royalties, rent from real property or capital gains do not create UBTI.

Tax On Debt-Financed Investments

An IRA or 401(k) investment that is debt-financed can also produce taxable Unrelated Debt-Financed Income (UDFI).  When mortgage financing or other debt instruments are used, the portion of the income attributed to the non-plan funds that were borrowed is deemed taxable.

A Solo 401(k) is exempted from tax on UDFI when the debt is associated with the acquisition of real property.

990-T Trust Returns

If a plan creates taxable UDFI or UBTI, then a 990-T Exempt Organization Business Income Tax Return must be filed.

There can also be a state tax that parallels the federal return, depending on the state where income is produced.

When your plan has a need to file, then you will need to have a CPA on your team to assist you.  Neither Safeguard Advisors nor your IRA custodian can file this return on your behalf.

990-T returns are due April 15^th.  If taxable amount will exceed $500, quarterly estimated payments may be required.

The 990-T must be filed electronically starting with the 2021 tax year.

Solo 401(k) 5500-EZ Filings

If you operate a Solo 401(k) and your plan value exceeds $250K in any given year, then the plan must file informational return 5500-EZ.

The return is due by the last business day of July for the prior tax year.

The return is simple, and includes some high-level numbers for the plan such as:

• Beginning of year balance
• End of year balance
• The total of new contributions made to the plan
• The total of distributions taken from the plan
• The total amount of any rollovers into to the plan
• Any outstanding participant loan balances

Many investors will choose to file themselves.  Often times it can be worthwhile to have a CPA do the filing, especially since electronic filing is required starting with the 2020 tax year.

What Kind of CPA Do You Need?

Not all CPAs are familiar with the 990-T return.  If you have a need to file, you will want to seek out someone who has expertise with this return type at both the federal and state level.

You do not need an “IRA Specialist” tax professional.  They are few and far between, and tend to charge a premium as specialists.  Unless you are engaging in very complex investments with your plan, this level of expertise is not necessary.

All tax-exempt entities are subject to tax on UBTI and UDFI.  So, any CPA who works with non-profits, churches, hospitals, etc. should be able to help you.

If your CPA cannot help, ask them if they know someone who can.  If not, just perform an internet search locally for “CPA + Non-Profit” or “CPA + 990-T”.

It is important to remember that this filing is entirely separate from your personal return.  So, if your retirement plan needs a different CPA than you, that is OK.

Other Reasons You May Want a CPA

Even if your plan investments do not create a need for tax filings, there may be reasons to have a CPA on your team.

If you run a business and sponsor a Solo 401(k), you will want a professional to help you strategize around making contributions to your plan, and to help with calculating how much you can contribute based on your income and business tax structure.

CPAs are not just for help with tax filings.  A good CPA can be a business coach, financial strategist, or a second set of eyes to perform diligence on an investment opportunity you may be considering.  It can also make sense to discuss estate planning matters with your CPA if they are qualified in that area.  Any time you can add meaningful guidance to your team, that can be valuable.