If you are actively planning for your retirement, the chances are good that you have explored the various benefits provided by individual retirement accounts, or IRAs. IRAs have become a widely utilized investment tool for individuals of all ages and income levels thanks to the diverse investment opportunities it provides. Although an IRA offers limited tax protections by shielding your investments from current taxation rates, you may still be required to pay taxes if you have invested in master limited partnerships, or MLPs. The unrelated business taxable income, or UBTI, generated by MLP in IRA scenarios may require you to pay taxes.
MLP in IRA Investment Taxes
If you have invested in an MLP in IRA, the income your IRA receives through this is classified as UBTI. For any income your IRA receives over $1,000, you are required to report this UBTI on your tax return. The Internal Revenue Service (IRS) taxes UBTI using the trust tax table, which features significantly higher rates than standard income. For example, UBTI over $12,500 could be taxed up to 37 percent.
As you can see, this rate exceeds those of other common taxation paradigms, including both long- and short-term capital gains. Unlike other personal investments, however, the taxes due as part of your investments with an MLP in IRA platforms must be made from the IRA itself. This requires a special form of reporting that differs significantly from the standard income tax forms.
Other Important Considerations
If you are paying taxes on UBTI through your MLP in IRA investments, it is absolutely essential to ensure that your retirement account has enough funds available to cover the debt that is due. In times of market volatility, IRAs focused on high-risk investments may lose money quickly. This could pose a significant problem during tax season if prior MLP investments have generated over $1,000 in UBTI and created the need for tax reporting. With that in mind, investors should always ensure that their IRA has enough funds available to cover potential tax liabilities.
Reporting Your Taxes
In order to report UBTI income generated through your IRA's MLP investments, the IRS provides Form 990-T (Exempt Organization Business Income Tax Return). This form provides investors with the opportunity to report all applicable UBTI. Depending upon the amount owed, investors can gain a clear picture as to what their tax liability will be for their IRA over the previous year.
The IRS provides a list of the organizations and programs that must file Form 990-T, as well as the definitions of these entities. Some organizations need to file this form by April 15 after the end of a tax year, and other organizations are required to file by May 15 after the end of their tax years. You can fine these instructions by visiting IRS.gov/forms and searching for this form by number.
Historical Trends to Consider
The relationship between IRAs and UBTI has remained relatively static in recent history. With that in mind, investors can continue to expect high taxation rates on their qualifying UBTI created from MLP in IRA investments throughout the foreseeable future.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.