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In a few specific circumstances, an IRA may invest in such a way that it is required to pay Unrelated Business Income Tax (UBIT). Please consult New Direction Trust Company's UBIT Guide for more information. It is the account holder's choice as to whether the account invests in an asset that might incur UBIT. UBIT payments must always come from the account itself and never from your own pocket.

An IRA or HSA will use an IRS Form 990-T to calculate UBIT. We recommend consulting with your accountant or tax professional.

When will my IRA incur UBIT?

Passthrough Business

Passthrough businesses don't pay taxes at the corporate level; as the name suggests, they pass those taxes through to their investors. As such, if your self-directed retirement plan derives earnings (referred to as Unrelated Business Taxable Income or UBTI) from such a business, it will have to pay taxes on any income attributable to the investment.

Two other key points to bear in mind:

  • Your IRA will never have to pay UBIT if the business it's invested in pays taxes at the corporate level.
  • There's an important distinction between an asset and a company that makes money on an asset. For instance, your IRA could acquire land for oil extraction (no UBIT) or invest in a privately-traded oil company (possible UBIT).

Debt-Leveraged Property

If your IRA took out a non-recourse loan to purchase property, any earnings yielded from the leveraged portion of the asset (referred to as Unrelated Debt-Financed Income or UDFI) may incur UBIT. For example:

  • Your IRA holds a rental property. It paid cash for half and financed the other half (50%).
  • The rental property earns $10,000 in a given year. Since the debt percentage is 50%, half of those earnings ($5,000) will be taxed at the current UBIT rate.

The debt percentages from each of the previous 12 months will be averaged to represent the single debt percentage for that year. Profits garnered from the sale of a debt-leveraged property will also be subject to UBIT, but not at the current Trust Rate. Such profits would be taxed as capital gains.

UBIT chart

UBIT Education

UBIT - It's a Good Thing!

Could your alternative IRA approach involve UBIT? Don't let that deter you! This informative webinar from our sister company, IRA Tax Services, will show you how an account that pays UBIT can still achieve its lucrative potential.

UBIT webinar
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Investor's Guide to UBIT

Download our FREE investing guide for an introduction to UBIT, the investment strategies that may incur UBTI or UDFI, and the appropriate steps to take in reporting and paying UBIT on behalf of your self-directed IRA.

UBIT investing guide
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