UBIT tax rate 21%? Did UDFI tax rate drop to 21%?

[Todd Willhoite]

I have heard that the UDFI tax rate dropped to the corporate rate of 21%.  Did the new tax law also change the UDFI tax rate to 21%?

[Brian Eastman]

@Todd Willhoite

The changes you note apply to corporations in the tax exempt realm such as a 501(c)(3).  

An IRA or Solo 401(k) is a trust and therefore not affected by the rate changes. Current trust tax rates will still apply to UBI or UDFI generated from a self-directed retirement plan. The trust rates were reduced slightly with the 2017 tax law, but not nearly as much as the corporate rates.

2018 Estate and Trust Income Tax Rates

If taxable income is:                                The tax is:

Not over $2,550                                       10% of taxable income

Over $2,550 but not over $9,150          $255 plus 24% of the excess over $2,550

Over $9,150 but not over $12,500        $1,839 plus 35% of the excess over $9,150

Over $12,500                                            $3,011.50 plus 37% of the excess over $12,500

Because of the new corporate tax rates, the use of a UBIT Blocker corporation may now make sense for those investors wishing to regularly engage in UBIT exposed activities such as house flipping. The IRA or 401(k) may own a taxable corporation used for the business activity. That corporation will then pay the corporate tax rate of 21% instead of the maximum trust rate of 37%.

By replacing UBIT with corporate tax, the rate drop is significant enough that the net after-tax ROI to the IRA may still be favorable relative to other passive opportunities the IRA may have access to.

This is not a meaningful strategy for the typical $50-$100K IRA, but for someone with the capital to really do a volume of flip transactions, it can be worth exploring.