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

September, 23 2020 by David E. Du Val, EA

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.

Deductibly Yours,
Dave