Unpleasant Tax Surprise for Thousands of IRA Holders

Unpleasant Tax Surprise for Thousands of IRA Holders

Unpleasant Tax Surprise for Thousands of IRA Holders

Imagine getting a letter in the mail telling you that you owe more than $24,000 in taxes, with about a fourth of that total being because of late penalties. That’s the kind of surprise that nobody ever wants to get.

However, that’s exactly what happened to one unsuspecting investor thanks to shares that he held in a master limited partnership through his Roth IRA; and he is not alone. Thousands of taxpayers who hold shares of master limited partnerships, or MLPs, are receiving the same kinds of notices.

While the amounts may vary, the nasty extra tax bill is shocking nonetheless. So why is this happening? It usually comes down to complicated tax rules that many people aren’t aware of when they invest in MLPs.

MLPs Come With Risks and Traps

Master limited partnerships usually produce, refine, store and transport energy and they normally send the majority of their earnings to their shareholders. They sound like very appealing investments, but they have some possible traps that all investors should be aware of, including hidden fees and taxes.

These hidden fees aren’t just catching investors off guard either. Many brokerage firms, as well as advisors, have also been surprised by these traps. The problems occur because even though IRAs have several benefits they also have some limitations.

Thanks to an anti-abuse provision, owners of IRAs that use them to invest in partnerships rather than stocks or bonds must pay taxes on some of the annual income earned by the MLP. This is called UBIT, or Unrelated Business Income Tax, which carries a top tax rate of 39.6 percent that kicks in at around $12,000 of taxable income.

IRA Custodians Must File the Form

To make matters worse, when this tax comes due, the IRA trustee must file and even sign the IRS form to report the income. That means the IRA owner will actually receive a signed document informing them of the tax, without any other notification. The owner, of course, is usually responsible for actually paying the tax as well.

It’s because of these rules that many experts advise investors not to put partnerships that are publicly traded into their IRA accounts. Unfortunately, however, many investors never get this warning and end up learning the hard way.

Even when IRA custodians fail to inform investors of these rules, the IRS still requires them to file the Form 990-T for all IRAs that have at least $1,000 of gross unrelated business income.

Ask GROCO for Advice

This is just one of the many kinds of tax rules that can catch a taxpayer off guard. Unfortunately while it might not seem very fair, it is the law and in the end the taxpayer will almost certainly be the one that has to pay the bill. Fortunately, these are the kinds tax traps that GROCO can help you avoid.

We make sure that you understand all the taxes that you will be responsible for when you invest, as well as with all other kinds of income and revenue. If you need help with your investment taxes, then please contact GROCO today at 1-877-CPA-2006.

We hope you found this article about “Unpleasant Tax Surprise for Thousands of IRA Holders?” helpful.

If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

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Alan Olsen, CPA


Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.


Alan L. Olsen, CPA, Wikipedia Bio


GROCO.com is a proud sponsor of The American Dreams Show.



The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:

Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…

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MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.

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