Unrelated Business Income and IRAs?

by leochouinard | March 26, 2015 12:09 am

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.)

Source URL: https://www.stockgumshoe.com/2015/03/microblog-unrelated-business-income-and-iras/


  1. 12477 |
    Travis Johnson, Stock Gumshoe
    Travis Johnson, Stock Gumshoe
    Mar 26 2015, 01:51:23 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 entities as partnerships (though there are probably plenty of real estate-focused partnerships, too, which are different from REITs). I believe the IRS has specifically stated that common shares of REITs do not generate UBTI for the charities or IRAs which may own them — but don’t trust my opinion alone.

    These resources might be useful, and they’re less obtuse than the IRS publications:

    https://www.reit.com/investing/reit-basics/reit-faqs/taxes-and-reit-investment
    http://www.naptp.org/InvestorRelations/IRFAQs.htm

  2. Avatar
    James Hurley
    Mar 26 2015, 02:04:22 pm

    I’ve had investments in my IRA since 2011that are consider to have UBTI payments. I’ve found that only investments that send a K-1 will have UBTI earnings. You need to look at the value of line 20V, which may be positive or negative. The sum of these from the different companies is your total UBTI income. Reading the instructions for the form 990-T it states that gross income is to be used, which I would say would mean the sum of UBTI for all your IRA’s (I only have one.) I’ve yet to have a positive gross UBTI, so I track it, but don’t worry too much about it when I’m thinking about buying a stock.
    Disclaimer: I’m not a tax expert, I did do quite a bit of digging when I found out that I had stocks that fell into this category.

  3. Avatar
    Leo Chouinard
    Apr 3 2015, 12:48:36 am

    Thank you both. Travis, the links certainly help. James, it sounds like when researching an investment, I can do an Edgar search to see if they have any K-1 filings, and if not, not worry about it. Appreciate the info, guys.

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