UBIT and Publicly Traded Partnerships (PTP): An Example from Fidelity

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A member of our staff was recently contacted by Fidelity, with whom he holds two IRA accounts. One of these IRAs is invested in a publicly traded partnership (PTP), which allows partners to contribute capital and acquire shares exchanged on public markets. The letter he received advised him to file a Form 990-T because the income earned by the PTP was subject to unrelated business income tax (UBIT).

Form 990-T reports any income on which taxes may still be due. Any profits yielded by a pass-through entity will be regarded 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 even if their tax-advantaged plans haven’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 IRA company may not have access to UBIT information related to your investment, so you will likely 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 now. He therefore owes UBIT on that operating income and will need to file a Form 990-T, likely after applying for an extension with the IRS.

The bottom line: If your 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 the Form 990-T on behalf of the account. Any due taxes must be paid by the IRA or 401(k).

The benefits of IRA accounts often come with additional responsibilities, but they’re certainly no reason to shy away from alternative assets. Education is a powerful tool in self-directing your retirement, and New Direction IRA is here to help. If you’d like to know more about self-directed retirement investing and UBIT, please don’t hesitate to contact our office. You may also speak with our partner company, IRA Tax Services, for specific information about filing a Form 990-T.

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