The main topics of this lesson are: Allowable Investments; Illiquid Investments; Business Interests; and Publicly Traded Partnerships. For this lesson refer to the Study Notes and watch the video for a synopsis.
IRAs may invest in most offerings. However, they may not hold debt. One cannot borrow from or lend
from an IRA. Because of the restriction on debt many options and futures are not allowed nor is short
selling of securities. IRAs can hold precious metals and real estate. However, these items present very
specific issues particularly when there are Required Minimum Distributions, or RMDs.
For illiquid investments a formal valuation of the item must be made bi-annually which can be costly. If
an RMD is required there must be other assets (such as cash) available in the IRA to make the payment.
IRAs may also own business interests – partnerships, LLCs, publicly traded partnerships. These holdings,
especially if they are in a closely held business, have the same valuation pitfall as the illiquid investments
described above. However, that is not their only issue. Although earnings and growth within IRAs are
not taxable, unrelated business income is. Business income over the taxable threshold ($2550 for 2018)
is subject to tax at 25% rising to 39.6% at higher income levels. Income earned by business interests
other than investment earnings is subject to unrelated business income tax.
Publicly Traded Partnerships
Publicly Traded Partnerships can also generate unrelated business income tax. Annual filings are
required. Note that these types of returns can be costly. One thing to note, from time-to-time the IRS
announces areas that they feel require their focus as there are, in their opinion, either a large number of
unfiled returns or a large amount of untaxed income. Recently, the IRS indicated that unrelated
business income tax was an area of focus.
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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Supporting documentation for any claims and statistical information will be provided upon request.
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Disclosure: Tax-Related Circular 230 Notice
The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.