Does tax from UBTI have to come out of the retirement account and if so, can it be part of your RMD?

[dmertz]

UBIT is paid by the retirement account using the assets in the retirement account.  It is not paid by you and simply reduces the value of your retirement account.  It is not a distribution, so it does not count toward your RMD.

[mysman1]

Thank you. In my case, the IRS took the withdrawal, and charged some interest/penalty. In the future how do I avoid this? Can I directly pay the IRS from my retirement account?

[dmertz]

Normally the retirement account would file Form 990-T to report the UBTI and pay the UBIT.  If the trustee of the retirement account requires you to prepare the Form 990-T, that would require coordination with the trustee of the account.  Did Form 990-T not get filed and the IRS ended up assessed the tax and took funds from the retirement account to pay the UBIT?  The IRS "withdrawing" funds from the account under these circumstances would not be a distribution and would not be reported on Form 1099-R.

[mysman1]

My Fidelity retirement account filed for an extension and then completed the 990 in June and notified me, I believe. I missed the notification and then in July the IRS made the transfer. I guess I'm wondering what's the right way to handle this so as not to incur any late fees/penalties. Thank you.

[dmertz]

The instructions for Form 990-T indicate that the deadline for the retirement account to file the form or request a filing extension is April 15.  The extension is an extension to file, not an extension to pay the tax, so while the extension avoids a late-filing penalty if the form is filed by October 15, it does not avoid the late-payment penalty and interest which accrues after April 15.  If the partnership is filing under an extension and does not issue the Schedule K-1 until after April 15, I'm not sure that it's possible to avoid a late-payment penalty and interest.  It might be that the only way to avoid the situation is to not invest in investments that can generate UBTI.

[mysman1]

Thanks, very informative.

[egrobinson]

I rolled over my IRA to my 401(k) in 2023. I recently received a letter from my IRA stating that my closed IRA account owes taxes on UBTI, they are going to file IRS Form 990-T and that they may be required to file without payment (total tax due is $40).  My 401(k) is also unable to pay the taxes due. How do you pay UBTI taxes which are the product of an already-closed IRA account? 

[dmertz]

If you have another IRA, you could potentially move enough funds back to the closed IRA account  by trustee-to-trustee transfer to cover the UBIT.  If you have no other IRA, you might be able to roll the necessary amount from the 401(k) back into the IRA, plan permitting.  Regardless, this is an amount that should not have been rolled over to the 401(k), so it needs to be removed from the 401(k).