Publicly traded or private partnerships within the IRA can create UBTI or unrelated business taxable income. Learn how to report this information when filing taxes.
An Individual Retirement Account (IRA) is a tax-favored vehicle used to invest for retirement. With a traditional IRA, you may be able to deduct your contributions from taxable income, and if you have a Roth IRA, your distributions may be tax free. It’s also true that dividend and interest income earned in an IRA is not taxable as income.
But here's something you may not know about your IRA and taxes: there may be tax implications and some additional filing if you’re invested in publicly traded or private partnerships, via what's known as unrelated business taxable income (UBTI). That's the name for income generated by a tax-exempt entity, by means of a taxable activity.
Let’s look at two hypothetical IRA accounts with unrelated business income.
This account has three partnerships. The amounts of UBTI are $2,000, $500, and $500; that’s a total of $3,000. You will need to file a 990-T and pay taxes on $2,000 of UBTI (the first $1,000 is deductible).
This account also has three partnerships. The amounts of UBTI are -$2,000, $1,000 and -$2,000, for a total of -$3,000. Although this amount is negative, you can still file a 990-T, and it may be possible to carry the amounts forward to offset future taxation. You may want to speak with a qualified tax advisor for assistance.
If you determine that you need to file a 990-T, take a look at the UBTI Action Plan prepared by TD Ameritrade.
TD Ameritrade does not provide tax advice. Please consult with a tax professional regarding your specific circumstances.
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