Can some securities (like MLPs) be taxed, even when held in a tax-advantaged account like an IRA?
For securities like master limited parternships, it actually doesn’t matter whether its a Roth IRA, 401 (k), education account or any other kind of tax-advantaged account. The return of capital payments that you receive from MLPs are considered UBTI (unrelated business taxable income) and that means you WILL owe taxes if it’s in a tax-advantaged account. There is an exemption for the first $1,000 of UBTI payments per year — that’s a total figure for all tax-advantaged accounts, not a per partnership figure. The tax accounting for these things isn’t really all that bad — at least not as bad as some make it out to be. And the MLPs actually keep track of everything for you in terms of cost basis, etc. They all have K-1 help lines you can call if you can’t work out how to pay the taxes. However, owning them in an IRA adds multiple layers of complication and is best avoided.
