Viewing Question: What happens if I buy an MLP in an IRA?

1 Response

  1. I think you’re asking about UBIT, or unrelated business income tax. A little background: MLPs are treated differently from other stocks for tax purposes. They are pass through partnerships as far as tax is concerned and because of that they send K-1s rather than 1099s. For taxable investors, this has some advantages because dividends are not taxed twice (at the corporate and then individual levels). However, for tax exempt investors, because they are different, they can subject create what’s called Unrelated Business Income which is taxable. The amount of UBI an MLP produces changes every year and may be negative.

    Now, if you have $1,000 or less in UBI, you don’t have to file. If you do have $1,000 in income, you will have to file, and frequently, your custodian may deduct and withhold assets for tax reasons automatically too which may be disadvantageous for you. Additionally, if you have negative UBI, you may be asked to forward your K-1s as well so that they can account for the UBI and carry it forward to offset future gains in the name.

    UBI and K-1 forms can be complex and time consuming. You may want to consult an advisor and accountant before considering this.

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