High Yield, Hidden Risk: The Tax Pitfalls of Partnerships and Alternative Assets in IRAsWhat Every Income-Seeking Investor Needs to Know About UBTI
From popular energy infrastructure names like Energy Transfer LP (ET) to certain real estate deals, private equity funds, and crypto staking ventures, income-generating investments are more accessible than ever. But when held inside tax-deferred accounts like IRAs, they may quietly expose investors to Unrelated Business Taxable Income (UBTI)—and the tax bill that follows.
Whether you're chasing yield, diversification, or alternative exposure, it's essential to understand how structure—not just strategy—can make or break your tax efficiency.
*Please note that nothing here is tax advice. Always consult your CPA or tax professional for your unique situation and to verify current accuracy as tax laws can and do change*
When an IRA Becomes a Taxpayer
IRAs were designed to grow tax-deferred, but UBTI changes the rules. If your IRA earns more than $1,000 in UBTI annually, it must file Form 990-T, and pay federal taxes at compressed trust tax rates, which means the higher brackets kick in at much lower income levels than for individuals. For example, in 2025, trust income over just $15,200 is taxed at the top 37% federal rate.
This is why even modest UBTI exposure—often from MLPs, private equity, or leveraged real estate—can have outsized tax consequences inside retirement accounts.
UBTI is often generated when an IRA owns:
Publicly traded partnerships (PTPs) like ET
Private partnerships and funds (real estate syndicates, private equity, hedge funds)
Debt-financed real estate investments
Certain crypto staking or mining operations (for example, the recently filed ethereum and bitcoin staking etfs slated for launch this year, currently uncertain as to how the IRS will classify the staking income)
These assets often flow through Schedule K-1s, and embedded business income or leverage can surprise even the savviest investor.
Why Selling Doesn’t Solve the Problem
Thinking you’ll just sell before any income is realized? Not so fast.
Even capital gains can trigger UBTI if the asset was debt-financed, as many PTPs and funds are. This subset—called Unrelated Debt-Financed Income (UDFI)—makes the sale itself taxable inside an IRA.
Does UBTI effect Roth IRA's too?
Yes, UBTI risk applies to both Roth and traditional IRAs. Even though Roth IRAs are generally tax-free and traditional IRAs are tax-deferred, they’re both considered tax-exempt entities under IRS rules. That means:
If either type of IRA earns enought Unrelated Business Taxable Income (UBTI)—typically from investments in partnerships, MLPs, or leveraged real estate—the IRA itself may owe tax.
The threshold is low: if total UBTI exceeds $1,000 in a year, the IRA must file Form 990-T and pay taxes at trust tax rates, which escalate quickly.
This applies regardless of whether the IRA is Roth or traditional. The key factor is the type of income, not the account type.
When the Juice Might Still Be Worth the Squeeze
Some investors accept the UBTI risk. Why?
They expect minimal or no UBTI, based on historical K-1s or tax shielding from depreciation.
They're using Roth IRAs, where long-term compounding may outweigh intermittent tax filings.
Their custodian is equipped to file Form 990-T and track UBTI thresholds.
Still, it’s a strategy that requires active oversight and annual review. It's far from the plug-and-play appeal of REITs, ETFs, or dividend-growth stocks.
Cleaner Income Solutions for IRAs
If you're looking for simplicity without sacrificing income, consider:
REITs and REIT ETFs, which typically avoid UBTI
Weekly-pay dividend ETFs with corporate wrappers (see our previous blog post!)
Utilities, pipelines, and infrastructure companies structured as C-corps
Structured notes or bond ladders tailored to IRA timelines
The key is matching investment structure with account type. Taxable accounts can house K-1 generators and take advantage of losses, while IRAs shine with clean-yield vehicles.
Can UBTI Over $1,000 Complicate Things for my IRA or Roth Beneficiaries?
Probably not in a catastrophic way—but there are a few wrinkles worth knowing.
If your traditional or Roth IRA incurs over $1,000 in UBTI, the IRA itself must file Form 990-T and pay tax from within the account. This doesn’t change the IRA’s tax-advantaged status, and it doesn’t “taint” the account for your heirs. However, here’s how it could indirectly affect them:
Reduced account value: UBTI taxes are paid from IRA assets, so if the tax bill is large—or recurring—it can erode the account’s value over time. That means less for your heirs when they inherit it. Again, these taxes must be paid from within the IRA itself—not from the account holder personally.
Administrative complexity: If the IRA holds UBTI-generating assets at the time of your passing, your heirs (or the custodian) may still need to file Form 990-T in future years, depending on the asset’s structure. That’s a headache they probably didn’t expect.
Roth IRA implications: While Roth IRAs are generally tax-free to heirs, if UBTI is generated post-inheritance (say, from a pass-through LP still in the account), the Roth could owe tax—even though distributions remain tax-free. It’s rare, but possible.
So to summarize, even a Roth IRA—famous for its tax-free benefits—can be hit with UBTI taxes if it holds the wrong kind of asset. And no, that tax liability doesn’t vanish upon inheritance. If a traditional or Roth IRA contains investments like MLPs or limited partnership interests, it may owe UBTI taxes on income exceeding $1,000 annually, no matter who holds the account or whether it’s been passed to heirs.
The good news? UBTI doesn’t revoke the IRA’s tax status, doesn’t affect other IRAs you own (each IRA is treated as a separate tax-exempt entity, so UBTI in one account doesn’t spill over to others), and doesn’t trigger income tax for heirs unless they take distributions (traditional) or violate Roth rules.
Final Word
The temptation to put everything under the IRA umbrella is understandable—but partnerships and alternative assets don’t always play nice. With the right planning, you can capture yield, avoid filing surprises, and keep the IRS out of your retirement strategy.
Have questions or feeling uncertain? You're not alone. At Maendel Wealth, we specialize in crafting tax-aware portfolios tailored to your specific goals. Whether you're planning for retirement, legacy, or growth, our team is here to guide every step of the way. Reach out today—we’ll handle the rest.
Email me directly at jmaendel@e-vestech.com or use our contact page at Contact Maendel Wealth
*Please note that nothing here is tax advice. Always consult your own CPA or tax professional for your unique situation and to verify current accuracy as tax laws can and do change*