written by reader Unrelated Business Income and IRAs?

By leochouinard, March 26, 2015

I became aware not that long ago of the Unrelated Business Income (UBI) Tax in the USA tax code, I frankly find the IRS Publication 598 which is supposed to explain it very unclear with regard to how it applies to an IRA (or presumably to an ESA or HSA) – it’s probably reasonably clear for a traditional charity, but it’s frankly very disappointing that the IRS doesn’t have a specific publication to explain how this applies to IRAs and the like, where the purpose of the ”charity” is to provide income. And as a retiree, whose investments are over 98% in my IRAs, I clearly need to understand this topic better.

Specific questions:

1) What investments potentially create problems for an IRA/ESA/HSA? I get the impression that distributions from MLPs are generally considered UBI for an IRA. I’ve also seen mention of REITs as a source of UBI. (Is that correct?) What other investments which are allowed for an IRA can create UBI tax liability? Are there ETFs or Mutual Funds that create UBI for the investor? In general, when considering an investment, is there a quick way to tell if UBI can or cannot arise from the investment?
2) Is it all payments by such entities that constitutes UBI, or only certain types of payments?
3) Is there any difference at all in this regard between a Roth IRA and a traditional IRA?
4) Are there any risks to investing in such entities for short term trades which do not span an ex-dividend date? Most of my investing is long term, but I occasionally try a short-term trade.
5) I get the impression from Publication 598 that each IRA is a separate ”charity” from the perspective of the IRS for UBI purposes. Is that correct? Since I have three different IRAs with different trustees (i.e. brokerage firms), to avoid the UBI tax do I just have to make sure each IRA stays below $1000/yr in UBI, or do I need to keep the sum of the UBI totals in the three IRAs below that amount?
6) Under what if any circumstances does it make sense to not worry about the UBI tax but plan to pay it rather than choosing a different type of investment?

Thanks for any guidance people can provide on this. (And apologies to the non-USA members for whom this is totally irrelevant.)

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.



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Travis Johnson, Stock Gumshoe
March 26, 2015 1:51 pm

I am NOT NOT NOT a tax advisor or expert, but here’s my understanding:

UBTI comes into play primarily with partnerships, like MLPs — the unitholder’s share of MLP income, if it exceeds $1,000 (across ALL partnerships held, I believe), may be taxable income even if held in an IRA. MLPs generally are not great candidates for IRAs anyway, since they have built-in tax-deferred features that you don’t get the benefit of with an IRA (you can’t lower your tax basis with all the return-of-capital payments most MLPs pay, for example). That said, UBTI applies only to taxable income from the partnership or other source — not the distribution amount. Most MLPs that I’ve had experience with have exceptionally low taxable income because of depreciation, depletion and other charges, the distributions are not primarily income.

I have never heard of UBTI being owed because of ownership of shares of a publicly-traded REIT or common stock, those are not the same kind of pass-through