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Why do I have to pay income tax on interest and dividends from

a Master Limited Partnership that...
Why do I have to pay income tax on interest and dividends from a Master Limited Partnership that is in an IRA
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Answered in 1 hour by:
10/4/2013
Lev
Lev, Tax Advisor
Category: Tax
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Lev :

Hi and welcome to our site!
Income in the form of interest and dividends from a Master Limited Partnership that is owned by the IRA and transferred to the IRA account is not taxable.
While funds are in the IRA - any earnings is deferred from tax liability until funds are distributed. When distributed - income is recognized for income tax purposes. But as long as the money are within the IRA - the tax liability is deferred.

Customer:

I hope his answer is correct because I received a letter from IRS saying we ow taxes on interest and dividends on a number of MLPs all held in an IRA. I plan to send a copy of this reply to IRS and see if they agree. I think they better start training their reps better and quit partying so much.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
Experience: Taxes, Immigration, Labor Relations
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The first question - why the IRS sent a letter?
Most likely because the IRS received a reporting from from MLP informing the IRS about taxable income passed to partners.
The MLP should send such forms to the IRS and to partners.
If forms were received by you - you need to provide that information to the administrator of your IRA account.

There's no prohibition against holding MLPs in IRA or other qualified retirement accounts.
As long as MLPs are distributed interest and dividend income - there should not be any issues.
However - there may be complications with keeping an MLP in an IRA with other income types. If MLPs are passing business income - there is a risk of passing the threshold of $1,000 UBTI tax for the IRA to pay.
But since your income is from interest and dividends only - that is not an issue.
See for reference - http://www.fool.com/investing/general/2013/03/18/an-investors-guide-to-master-limited-partnership.aspx
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Lev
Lev
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