Some shares of limited partnership companies trade on the stock exchanges, making investment as simple as buying any other stock. Called master limited partnerships, publicly traded MLP or LP stocks pass through earnings to investors without paying corporate taxes. Publicly traded LP shares can be held in an IRA, with some extra tax considerations to be aware of.
Buying LP Shares
Shares of publicly traded MLP/LP companies can be purchased with any brokerage account. To own LP shares in your IRA, you need to transfer your IRA money to a brokerage IRA, if you don't already have such an account. When you have an IRA established with a stock brokerage firm, you place the order for the selected LP shares using the stock purchase system of the broker. As of mid 2013, approximately 110 MLP companies were listed on the stock exchanges in the energy, transportation and financial sectors.
Potential Tax Issue
A portion of the earnings from a LP company may be classified as unrelated business income, which, under the tax rules, is not a type of income that can be tax-deferred in an IRA. The amount of UBI you earn from a MLP stock will be reported on the Schedule K-1 sent by the MLP company. An IRA can earn up to $1,000 in unrelated business income without any consequences. If your IRA earns more than the $1,000 limit on unrelated business income, the account must pay tax on the excess.
IRA Tax Return
When an IRA earns more than $1,000 in unrelated business income, a tax return must be filed on behalf of the IRA, and the account must pay unrelated business income tax -- UBIT. The tax return would be completed by the broker where your IRA is held, and the tax payment would come out of the account value. The only way to know if your IRA must pay UBIT is to add up the amounts of reported unrelated business income listed on the K-1 forms you receive for the LP shares held by your IRA.
UBIT Is Minor Issue
Most LP stocks report little or no unrelated business income, and you can own a significant number of LP shares in an IRA without incurring any UBIT issues. Before buying a LP for your IRA, call the investor relations department of the company and ask if the company has declared any UBI for investors. Another way to get limited partner-type investments is to buy shares of affiliate companies some MLP companies have set up to avoid any K-1 tax issues. You could also look at closed-end or ETFs focused on MLPs for your IRA. These funds do not pass the UBIT issue through to investors.
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