As our client, you know holding an account at Equity Trust allows for a wide range of investments, including and beyond the traditional stocks, bonds, and mutual funds. These options give you the opportunity to diversify and develop your holdings as you see fit for your goals. The right retirement account for you and the strategic use of taxable events, such as a Roth conversion, can also be of great benefit to your financial future.
When it comes to taxes and your IRA, there are times when you need to be aware of more than just what tax environment will provide you with the biggest benefit. For almost all investments, growth within the IRA is considered tax free; with taxable events occurring at the point of contribution or distribution depending on the type of IRA you hold. While most of us understand an IRA holding real estate or land will have yearly property taxes to pay as investment expenses, Unrelated Business Taxable Income (UBIT) is also possible with some types of investment strategies.
The generation of UBIT becomes a consideration when an investment in your IRA:
Takes on debt to finance an investment
Owns a business that is a flow-through entity, such as a Limited Partnership, a LLC, or a Land Trust
Invests in subject to’s and lease options
In general, there is a possibility of UBIT when an IRA investment benefits from something it does not own. With flow-through entities, it is not against IRS rules for an IRA to have ownership in a business, but it is against IRS rules if the IRA owns part in a business and does not pay taxes. Situations such as investing in a subject to and/or lease option can be seen as a possible grey area when it comes to UBIT and it is in your best interest to consider seeking advice from a qualified advisor to make sure you’re on the right side of the IRS. As you research investment options for your IRA, remember to consider UBIT as a possible expense.
As with all things related to tax, financial, or legal concerns, it’s in your best interest to have a discussion with a qualified, disinterested third party to determine if an investment aspect will be a specific concern for you. IRS publication 598
provides UBIT rules at a glance and reviewing it will help you form questions which will help make it easier to have this discussion with your tax advisor.
If you find you are responsible for paying any UBIT, you can either have a 990-T prepared by Equity Trust or engage a third party to complete this form. Equity Trust can only sign returns we prepare; if the return is prepared by a third party this preparer is responsible for signing. As with all IRA investment expenses, making payment to the IRS are required to come from your IRA and we would simply need a completed One-Time Bill Pay Direction of Investment (accessible through the myEQUITY
client portal) along with a copy of the prepared 990-T form.
For more details about Equity Trust’s 990-T preparation service, call 888-382-4727.