An IRA custodian recently contacted a member of our staff. His account invested in a publicly traded partnership (PTP), allowing partners to consolidate capital and acquire publicly traded shares. The letter he received advised him to file a Form 990-T because income yielded by the PTP was subject to unrelated business income tax (UBIT).
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Investing in a Publicly Traded Partnership
Form 990-T reports any income on which taxes may still be due. Any earnings garnered by a pass-through entity qualify as unrelated business taxable income (UBTI). Such entities don’t withhold taxes before distributing returns, so investors are responsible for paying taxes on those earnings. This is true even if the investor (a tax-advantaged account in this case) hasn’t received payments yet.
A publicly traded partnership can be a more passive investment vehicle with an ambiguous revenue model. You may assume that profits from publicly traded securities are exempt from special taxes or that distributions are the only taxable events inherent to your retirement plan. Neither assumption is necessarily true. Your custodian may not have access to UBIT information related to your investment, so you may have to seek clarification yourself. In the case of our staff member, the earnings from his IRA-held PTP weren’t taxed at the corporate level and he wasn’t notified about it until well after the fact. Therefore, he owes UBIT on that operating income and will need to file a Form 990-T.
The bottom line: If your self-directed IRA invests with a company in any capacity, you need to know about the structure of that company’s income and plan accordingly. Third-party IRA providers usually don’t administer publicly traded securities, but rules pertaining to UBIT are fairly universal. If an individual retirement plan holds UBIT-eligible assets, the plan holder must submit Form 990-T on behalf of the account. Any due taxes must be paid by the IRA.
Stay in the Know
Education is a powerful tool in self-directing your retirement, and New Direction Trust Company is here to help. If you’d like to know more about self-directed retirement investing and UBIT, please don’t hesitate to call us at 877-742-1270 or send us a message through the Client Portal. You may also speak with our partner company, IRA Tax Services, for specific information about filing a Form 990-T.