4

I've avoided holding Master Limited Partnerships (MLPs) in my taxable brokerage accounts since I don't want to deal with the tax complexities. But in an IRA (in my case ROTH), my understanding is that the Roth IRA will completely shield you from ever having to read a K-1. Is that true? Because then I saw this article:

http://www.wsj.com/articles/thousands-hit-with-surprise-tax-bill-on-income-in-iras-1447427436

which talks about a restructuring of a particular company that forced a tax event for its MLP units, even those that were held in IRAs. It mentions:

When owners use IRA funds to invest in partnerships, as opposed to stocks,
bonds, and funds, they owe tax on certain annual income from the partnership
exceeding $1,000 because of an antiabuse provision. This levy is known as 
Unrelated Business Income Tax, or UBIT

I guess my question can best be broken up in parts:

a) Is UBIT (Unrelated Business Income Tax) the only tax-related item for investors holding MLPs in their IRAs to be conscious of?

b) Is the UBIT tax only triggered by a one-time event such as the MLP being bought out or rolled up into the parent, or are your yearly MLP distributions subject to the $1000 limit? And is it $1000 per account or $1000 per MLP? (in other words you get $900 in distributions from MLP#1 and $200 from MLP#2 - are you subject to UBIT?)

c) Does your account broker (ie Schwab) do the paperwork for you and give you the bill (as the article seems to imply), or do you yourself need to understand the K-1?

  • The linked article is for WSJ subscribers only. Not much there beyond your excerpt. – JoeTaxpayer Jul 19 '16 at 0:49
  • Not sure why the link doesn't work for you. It worked for me and I don't have WSJ either. Here's a different angle from fox business : foxbusiness.com/features/2016/03/01/… – public wireless Aug 10 '16 at 17:56
3

You seem to have it right. Unless you have a big position, having MLP shares in your IRA will not cause you any tax hassles. Your IRA will get a Schedule K from the MPL (which may be mailed to you), but you won't need to do anything with that unless you're over the UBI limit. Last I checked, that was $1000, and you probably won't exceed that.

UBI in principle needs to be evaluated every year, so it's not necessarily a "one-time" event. If your IRA does go over the UBI limit, your IRA (not you) needs to file a return. In that case, contact your custodian and tell them about the Schedule K that you got.

See also my answer here: Tax consequences of commodity ETF

The question is about commodity ETFs in IRAs, but the part of my answer about UBI applies equally well.

  • So is UBI a $1000 limit per security, or does it trigger if ALL your MLPs add up to over $1000? Also, what sources of MLP income contribute to UBI? Is it just distributions, or distributions plus capital gains (supposing the MLP was bought out by another entity and they gave you cash for your shares). So for example, if I only have $2000 in an MLP with a 13% yield, then I'd get about $260 per year and not have to worry. But if the MLP was bought out and I had a capital gain of $800, plus the $260 distribution income, then I'd be over $1K and be subject to UBI? – public wireless Jul 19 '16 at 13:35
  • 1
    @publicwireless The question about whether they aggregate is a good one, and I'm not sure. I think it's that they do aggregate within each IRA account but not between different IRA accounts, but I am not sure. I don't have an extensive list of UBI sources. One of relevance is if you generate income in your IRA that is financed by a loan. (If the MLP took a loan, then for tax purposes that is passed to your IRA.) Here's a longer list online: investingdaily.com/18785/avoiding-taxes-on-your-ira – user32479 Jul 19 '16 at 13:44

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .