Why do some IRAs have to file tax returns and pay taxes?


The reason some IRAs have to file tax returns and pay taxes comes down to unrelated business taxable income (UBTI). There are certain transactions that cannot be carried out through your IRA without incurring taxes. Here, we take a closer look at the types of business transactions that may require the IRA holder to file a tax return and pay taxes. 

Video transcript:

Hi I’m Joe, Founder of WealthFlex. Let’s take a quick look at why some IRAs need to file tax returns and pay taxes.

Not all transactions done in an IRA are tax-advantaged. And some IRAs need to file a tax return called a 990t. The issue is what is called “unrelated business taxable income” or UBTI. It sounds like a goofy name for it, but it makes a lot of sense when you examine where it comes from.  IRAs are governed in a section of the treasury code that governs all tax-advantaged entities including non-profit organizations. Any income derived that is unrelated to the purpose of a tax-advantaged organization does not afford the organization the same tax benefits. So in the case of an IRA, the purpose is for individuals to save for retirement. So any activity not consistent with that in an IRA is either prohibited or it’s taxed.  

Let’s say your IRA were to buy a property for $1M, but only comes up with $1 down and then it borrows the rest. Well, the income and gains from that investment would pay taxes on the leveraged portion, or the average asset acquisition indebtedness. So 99.999% of it would be taxed, and at the trust tax rates, which hits the 37% tax bracket at $12,951 in income. 

This would be the same situation if your IRA were to purchase a percentage of any passthrough entity with those same facts.

Now, if your IRA were to purchase any portion of an entity that pays its own taxes, and doesn’t pass the business activity through to your IRA, then everything is fine. If you invest in Boeing stock with your IRA, for example, there’s no problem even though Boeing has acquisition indebtedness because Boeing pays its own taxes. If your IRA is a member of a passthrough LLC that borrows money to assets, there could be UBTI there and you should talk with a tax professional about that. 

The second area to be concerned about is the IRA engaging in business activity. Your IRA can buy an espresso cart and lease it out to someone who runs an espresso operation, but if your IRA hires a barista and uses the espresso cart to earn money, that income is UBTI. If your IRA’s UBTI is higher than $1,000, you must file a tax return and the IRA itself pays taxes on it. 

Learn more about how you can take retirement planning to the next level with a Yieldstreet IRA. Contact us at [email protected] with any questions.

Please note that the numbers used here are for illustrative purposes only. Yieldstreet cannot provide tax advice, so please consult a tax professional for advice specific to your situation. 

This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness, or any other aspect of such website (or article contained therein).

How helpful is this content?

Share this article:

Join a community of 350,000+ members

  • Gain access to unique offerings previously reserved for the ultra-wealthy

  • Customize your portfolio for income, growth, or a balance of both

  • Get started today and earn an average IRR of over 8%

What investors are saying about Yieldstreet

Apr 2022

The due diligence, risk management, and product education materials are thorough, excellent, and easy to use and understand.

Manoj J
Member since 2019
Apr 2022

Excellent and unique selections that I can't find elsewhere.

Jonathan S
Member since 2019
Apr 2022

The platform delivers in a very concise manner. Easy to get a clear understanding at a glance from the web or mobile app.

Tim S
Member since 2021
The testimonials presented on this page have been provided by actual investors in Yieldstreet funds without compensation. Yieldstreet has selected the testimonials, and certain testimonials have been edited to remove personally identifiable information and for brevity. Testimonials were not selected based on objective or random criteria, but rather were selected based on Yieldstreet's understanding of its relationship with the providers of the testimonials. The uncompensated testimonials presented here may not be representative of other investors' experiences, and there can be no guarantee that investors will experience future performance or success consistent with the testimonials presented.

The Yield

Our weekly podcast providing ideas about how to make money work for you and bring you closer to your dreams.

Since inception, over $2.5B has been invested on Yieldstreet

Join today for free to access alternative investment opportunities.