When is income from an MLP held in an IRA/SEP account taxable?

[pgregory24]

I have received a K-1 form from an MLP held in my IRA/SEP account listing "Unrelated business taxable income" greater than $1,000. Is such income taxable? 

[KatherineC · Accepted solution]

No, that income is not taxable to you. 

Any income that is reported to your retirement account would not be taxable until you take a distribution from the account.  Then it would be taxed as a retirement distribution.

[pgregory24]

Does this answer apply as well  to "Unrelated taxable income" that is reported in the K-1 received from the partnership?

[KatherineC]

If the K-1 is "owned" by your retirement account, none of the amounts need to be reported on your return.

[Allencar]

If your IRA earns more than $1000 in a year in UBTI (Unrelated Business Taxable Income); the IRA custodian will need to complete and file a Form 990-T and pay the "excise tax" due.  That tax money is removed from your IRA.  In addition to the taxes owed; starting for the 2018 tax filing year, Fidelity charges a $300 fee for completing the 990-T and paying the tax/penalties for you.  I don't know if other brokerages charge similar fees.

The details for this policy can be found at: https://www.fidelity.com/tax-information/tax-topics/ubti

Most MLP's will not generate more than $1000 of UBTI per year. Only 2 of my 9 MLP holdings show a positive UBTI value on the K-1 box 20-V.  The 2 that had a positive UBTI have been owned for at least 10 years.

Paying that $300 fee to Fidelity and still owing the tax would definitely eat into any advantage of holding the MLP which generates UBTI greater than $1000/yr in an IRA.

[DWP22]

I have a couple of investments in MLP's in my IRA.   Last year I received a completed form 990-T after I filed my returns.   My research leads me to the unfortunate conclusion that indeed the income over $1000 received from an investment in an MLP residing in an IRA is Federally Taxable in the year in which you receive it.   Is there a provision in Turbo Tax to address this and include this in the tax calculations?   I cannot find anything mention or even the acknowledgement of the form 990-T.   Any help would be appreciated.  

[macuser_22]

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@DWP22 wrote:

I have a couple of investments in MLP's in my IRA.   Last year I received a completed form 990-T after I filed my returns.   My research leads me to the unfortunate conclusion that indeed the income over $1000 received from an investment in an MLP residing in an IRA is Federally Taxable in the year in which you receive it.   Is there a provision in Turbo Tax to address this and include this in the tax calculations?   I cannot find anything mention or even the acknowledgement of the form 990-T.   Any help would be appreciated.  

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No,    And any tax can only be paid *by* the IRA - not you.

Unrelated business income is reported on a 990-T form.

If you hold a Limited Partnership or LLC in your IRA then any Unrelated Business Income in excess of $1,000 is taxable (even though it is in an IRA). It is not reported on your tax return but on a 990-T form. (The custodian of your IRA is required to file the form for you but you must submit the K-1 form(s) to them - ask the custodian about this).

Unrelated Business Income is reported as code "V" in box 20 on the K-1 form.

Also see pub 598.
http://www.irs.gov/publications/p598/ch01.html

Per the 990-T Instructions: https://www.irs.gov/pub/irs-pdf/i990t.pdf

"Who Must File
Trustees for the following trusts that
have $1,000 or more of unrelated trade or
business gross income:
1. Individual retirement accounts
(IRAs), including traditional IRAs"
4. Roth IRAs described under section
408A,

[Critter-3]

The IRA files the 990 and pays the taxes ... it is NOT reported anywhere on an income tax return.  If the IRA custodian sent you a copy of the 990 then that is only for your records.  

[DWP22]

Thank You macuser_22!    As is always the case, one question and answer then leads to additional questions.  I may have to seek advice from a Tax Accountant as to my best course of action regarding MLP's in an IRA.   There are fees being implemented for the prep of the 990-T Forms from the Custodian and the tax which needs to be analyzed to determine of the investment is worth it.  I now want to know if the prepaid tax has any subsequent impact on additional withdrawals from the IRA related to those investments.  

[DWP22]

Thank You!   

[macuser_22]

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@DWP22 wrote:

Thank You macuser_22!    As is always the case, one question and answer then leads to additional questions.  I may have to seek advice from a Tax Accountant as to my best course of action regarding MLP's in an IRA.   There are fees being implemented for the prep of the 990-T Forms from the Custodian and the tax which needs to be analyzed to determine of the investment is worth it.  I now want to know if the prepaid tax has any subsequent impact on additional withdrawals from the IRA related to those investments.  

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Unless this is a special type of self-directed IRA that you are the trustee of then you do not do anything other then give the K-1 to the IRA trustee.    As the IRS instructions that I posted say, it is the IRA trustee (i.e the financial institution  that holds the IRA) that files the 990-T and pays the tax from the IRA.    You cannot do that since the tax paid must be directly from the IRA to the IRS - you cannot do that.      Any money that you remove from an IRA is a reportable distribution to you and not a fee that the IRA itself must pay.    Only the IRA trustee can pay a fee from the IRA which would be a charge (fee) to the IRA and not a distribution.

[WMann]

That was my understanding also, but today I got a call from my broker saying I owed 5 figures in taxes for UBTI on a Roth IRA because I sold some shares last year.  I don't understand, my total profit was less than half of what my broker is saying I owe in taxes and my K1 box 20 V is less than 1/5 of what my broker says I owe in taxes.  

I requested a copy of the 990-T and it makes no sense.  I insisted the 990-T was not correctly completed, but no luck.  

Is this even possible where I made small profit on stock, but the taxes I owe are over twice my profit so it is basically a loss?

[TomD8]

@WMann --

I think you misunderstand the UBIT.

The UBIT is not a tax on your profit (your capital gain) from the sale of your shares.  

It's a tax on non-passive income that your IRA may have received.  And the UBIT tax rate can be as much as 37%.  This web article contains the 2021 UBIT tax table, plus an explanation of the tax:

https://directedira.com/self-directed-iras-real-estate-crowdfunding-and-ubit-tax-explained/

The UBIT is paid out of your IRA and is not reported on your personal tax return.

[WMann]

Thanks, you are correct.  I had held these shares for over a decade and all the tax became due when I sold, so it makes sense now.  Regret using IRA for MLP.  

Question: do I need to refile my 2021 taxes based on paying this tax or is it moot, i.e. no benefit? 

[Critter-3]

@WMann   Question: do I need to refile my 2021 taxes based on paying this tax or is it moot, i.e. no benefit? 

As the old saying goes ... what happens in an IRA stays in the IRA so you have nothing to report on an income tax return outside of the IRA.