Withdrawal of a Master Limited Partnership from a retirement account

[MLP_Banana]

Hello,

I hold Master Limited Partnership units in my retirement account (a Roth IRA).  I've held them for 5+ years, and I've had the Roth IRA for 5+ years.  I am over 59 1/2 years old.

Is a withdrawal of Master Limited Partnership units from an IRA or Roth IRA to a regular brokerage account treated as an in kind transfer, or is it treated as a sale by the retirement account and purchase by the regular account?  The owner of the retirement account and the owner of the regular account are the same individual (me).

If anyone knows the answer (is withdrawal of MLP units from a retirement account to a regular brokerage account with the same owner treated as a sale of the units by the retirement account, or not?) I would love to read the answer.

Regards

[tagteam]

I'm going to page @dmertz and @Mike9241 

[dmertz · Accepted solution]

"Is a withdrawal of Master Limited Partnership units from an IRA or Roth IRA to a regular brokerage account treated as an in kind transfer, or is it treated as a sale by the retirement account and purchase by the regular account?"

Essentially both.  Ignoring any transaction fees that might otherwise apply (and ignoring any potential effects on UBTI), an in-kind distribution from an IRA is equivalent to selling the investment within the IRA, distributing the proceeds, then repurchasing the investment outside of the IRA.

"is withdrawal of MLP units from a retirement account to a regular brokerage account with the same owner treated as a sale of the units by the retirement account, or not?"

Your IRA is not you.  An IRA is a tax-exempt trust, not a grantor trust.  The tax consequences of distributing an investment from an IRA in-kind are the same as selling the investment within the IRA and distributing the cash.

[MLP_Banana]

Thanks for your reply.  It makes sense.

In the case of withdrawing a Master Limited Partnership (MLP) from a retirement account do you know whether the withdrawal would be treated as a sale of the MLP in the account, and potentially trigger recognition of UBTI  in the retirement account from that sale?  This is the reason for asking the question.  If withdrawing MLP units in a retirement account is treated as a sale in the retirement account followed by a repurchase in the regular individual account, then the sale in the retirement account is subject to taxes if the resulting UBTI is above $1,000.

[dmertz]

I can only speculate about the answer to the UBTI question, I don't really know.  I suspect that an in-kind distribution is a transfer of ownership without a sale and that the only UBTI that would be realized is the amount that there would be in the absence of a sale.  The IRA would be responsible for the UBIT realized through the date of the distribution and you would be responsible for UBTI afterwards.  I think the question is best posed to the MLP to see how they will report UBTI on the Schedule K-1 issued to your IRA and the Schedule K-1 issued to you.

I've modified my original reply to indicate that it ignores UBTI.

[Mike9241]

@MLP_Banana i agree with @dmertz basically the Roth IRA sold the investment for FMV on the date of distribution, which, since it is tax exempt, produces no tax consequence for it and none for you since the Roth had been established for the requisite period. If it had been a regular IRA you would have a taxable distribution (FMV). In any case your basis is now the FMV on date of distribution. Hopefully the K-1 will properly reflect the transfer. your k-1 should show zero beginning capital and capital contributed the same as the FMV unless you buy more shares.  

[MLP_Banana]

Hmm, now you've confused me. 

The first response says "an in-kind distribution from an IRA is equivalent to selling the investment within the IRA, distributing the proceeds, then repurchasing the investment outside of the IRA."

The second response says "I suspect that an in-kind distribution is a transfer of ownership without a sale ..."

The only reason I asked the question was to learn about the UBTI effect (if any) in the Roth of an in kind transfer of an MLP from my Roth account to my regular account.

If a withdrawal of an MLP from a Roth is the equivalent of a sale in the Roth, then there may be UBTI resulting from the sale in the Roth.  On the other hand, if a withdrawal of the MLP is NOT (for tax purposes) a sale of the MLP, then there would be not UBTI in the Roth from the withdrawal.

I have asked the MLP, and they decline to answer.  They suggest I ask a tax advisor, thus I've asked the question here.

So I guess I should disregard your first answer which says an in kind withdrawal from a Roth to a regular account is the equivalent of a sale and repurchase?  Whether or not the Roth considers the withdrawal a "sale" is the key question (because sales of MLPs inside of a Roth can produce UBTI).

[MLP_Banana]

"basically the Roth IRA sold the investment for FMV on the date of distribution, which, since it is tax exempt, produces no tax consequence for it "

Not correct.  A portion of the gain on the sale of an MLP inside of a Roth may be classified as UBTI, and any UBTI above $1,000 inside a Roth is taxed at 37%.

Whether or not an in kind transfer from a Roth to a regular account (both with the same owner) is considered a sale by the Roth, or not, is the key question.