Is income from a Limited Partnership held in an IRA taxable?

September 23, 2020 by David E. Du Val, EA
Master Limited Partnership

Is income from a Limited Partnership held in an IRA taxable?

Ron


Ron,

While your question seems straightforward, the answer (like many parts of the IRC—Internal Revenue Code), sadly, is not.
 
Generally, a “regular” limited partnership does not throw off any income that would make it currently taxable while it is inside an IRA, as the gains on funds within an IRA are generally nontaxable until you take distributions (i.e., withdraw the money). However, if you purchase shares in a master limited partnership (MLP), then you need to be aware of the special tax rules that apply to those investments.

Because the shares of an MLP represent an interest in the partnership, any income they produce is considered a partnership distribution and is taxable as such. A company that issues MLP shares does not pay corporate income tax, but instead distributes income to its partners or unit-holders. This income becomes taxable income to the shareholder.

When you hold MLP shares within a retirement account, such as an IRA, this income—if it totals $1,000 or more—is considered unrelated business taxable income (UBTI.) That makes it subject to immediate tax, unlike most other investments you might hold in an IRA, where your earnings are usually tax-deferred or, in the case of Roth IRAs, tax-free.

You can learn more by visiting this link on the IRS web site.

Deductibly Yours,
Dave

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David E. Du Val, EA
Chief Compliance Officer for TRI Holdco

 

Dave Du Val, EA, is Chief Compliance Officer for TRI Holdco. Inc., the parent company of TaxAudit, and Centenal Tax Group. A nationally recognized speaker and educator, Dave is well known for his high energy and dynamic presentation style. He is a frequent and popular guest speaker for the California Society of Tax Consultants, the California Society of Enrolled Agents and the National Association of Tax Professionals. Dave frequently contributes tax tips and information to news publications, including US News and World Report, USA Today, and CPA Practice Advisor. Dave is an Enrolled Agent who has prepared thousands of returns during his career and has trained and mentored hundreds of tax professionals. He is a member of the National Association of Tax Professionals, the National Association of Enrolled Agents and the California Society of Enrolled Agents. Dave also holds a Master of Arts in Education and has been educating people since 1972. 


 

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