THE ANSWER MAY SURPRISE YOU!
Self-directed Individual Retirement Accounts (IRAs) can be attractive investment options for taxpayers who are looking for a nontraditional approach to growing their retirement accounts. However, if the IRA owns a publicly traded partnership (PTP), it can generate taxable income in the form of Unrelated Business Taxable Income (UBTI). When this happens, account owners with more than $1000 in gross UBTI must file a tax return (Form 990-T), and in some cases may even be required to pay quarterly estimated taxes.
Taxable income in a self-directed IRA is much easier to trigger than you may think. For example, if the self-directed IRA owns an LLC with a business interest, and the IRA receives pass-through profits each year from the LLC, it may be subject to UBTI rules. When UBIT is triggered, the income will be not be taxed at the taxpayer’s income tax rate, but at the current U.S. trust tax rate, which is equivalent to a 39.6% tax bracket for income exceeding $12,150 in 2014. Often, this tax exceeds any return the fund may have experienced throughout the year.
UBTI, if any, is reported by the investment company to the investor on an annual K-1. If you received a K-1 for any of your self-directed IRA investments, please review them carefully as they may require your immediate attention. If you work with multiple investment companies, you may need to include any additional Schedule K-1s that were mailed directly to you from each company in order to accurately determine your tax liability.
When considering your IRA investment strategy, it’s very important to understand the tax consequences associated with the many available options. Our team of professionals is here to help. Should you have any questions, please contact our office at 402.423.4343.