Don't Get A Surprise Tax Bill From Your IRA

WKBT
April 1, 2021 9:00 AM
MoneyTips
Posted:
Updated:
You probably know about potential IRA tax traps related to withdrawals, rollovers, and estate planning that can saddle you with penalties and surprise tax bills. Did you know that the type of investments you hold could also hand you a surprise tax bill and potentially ruin your IRA status?
The most common of the traps results in tax bills through Unrelated Business Taxable Income (UBTI). The sources of business income from stocks, bonds, and funds such as interest income, capital gains and dividends are exempt from UBTI and the corresponding tax (unsurprisingly called the Unrelated Business Income Tax or UBIT). IRAs that operate a business, have certain types of rental income, or receive income through certain partnerships, are subject to taxation once the total UBTI exceeds $1,000. The purpose is to prevent tax-exempt entities from gaining an unfair advantage on regularly taxed business entities.

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