paying taxes in an IRA and SEPP plans

L1: paying taxes in an IRA and SEPP plans
Hello. I started a SEPP plan in September of 2008 at age 55.
I hold some mlp’s in my IRA. I trade them mostly and do this to avoid capital gains taxes.
I know that keeping mlp’s in an IRA could subject me to federal income taxes if the UBTI (Unrelated Business Taxable Income) from the mlp’s i hold exceeds $1000 in any year. I’ve bought some recently with high yields and plan to hold them.
Taxes on UBTI must be paid from the IRA.
My question is will payment of income taxes from an IRA be considered a withdrawal and therefore break my SEPP plan and cause me to have to pay the 10% penalty on past withdrawals?

2011-08-30 12:21, By: LordXot, IP: [72.184.116.197]

L2: paying taxes in an IRA and SEPP plans
1. Your trading of MLPs, or anything, within an IRA or SEPP plan is meaningless. NO SALES of securities within an IRA or SEPP are subject to capital gains taxes. Apparently you need a tax practitioner to guide you, rather than doing your own taxes. ( If
you have one who told you to do this, change practitioners.) You pay taxesONLY on withdrawals from IRAs, and SEPPs.
2. I do not remember ever seeing UBIT on MLPs, except occassionally on municipal bonds. Most of my clients have MLPs for preferred securities, so I see a large number of them reported by the brokers, usually as dividend income, except for a few which are
reported on K-1s.
If you have any with foreign income taxes withheld, or somehow UBIT, I would not hold them in a SEPP, and possibly not in an IRA ( because income in an IRA is not taxable anyway, so those foreign taxes merely reduce your yield).
Double check with your broker whether any of them really have UBIT.
2011-08-30 13:07, By: dlzallestaxes, IP: [96.227.217.194]

L2: paying taxes in an IRA and SEPP plans
Let me rephrase the question.
If i have to pay taxes on UBTI in an IRA with funds from the IRA, does the payment of taxes count as a withdrawal that will break my SEPP plan and incur a 10% penalty on past withdrawals.
I will of course have to check this out but thought perhaps some on this forum have run into the issue before.
2011-08-30 13:46, By: LordXot, IP: [72.184.116.197]

L3: paying taxes in an IRA and SEPP plans
SEPP Plan distributions using either Amortization or Annuitization methods WITHOUT recalculation will be the same amount each year for the duration of the SEPP Plan, ie, 5-years and age 59.5, whichever is the longest. What you do with distributed funds
is your choice … spend it or pay taxes. Distributions using the Minimum Distribution method require annual recalculation.
I’m with DLZ in questioning your need to pay taxes for a MLP held within an IRA since all IRA activity is tax deferred until funds are distributed.
Jim F
2011-08-30 13:54, By: Jim F, IP: [70.167.81.119]

L4: paying taxes in an IRA and SEPP plans
I agree with the others that these investments are best avoided in SEPP IRAs, as would any investments that carry additional complications and transactions involving the IRA.
But to your specific question, if you DID have UBTI over $1,000, the IRA custodian will usually (but not required to) file the 990 Tform to pay the UBIT tax from the IRA. This will not generate a 1099R amount, so will not bust
your SEPP. It will just erode your IRA balance. The funds to pay the tax MUST come from your IRA, not from you. If you paid the tax from non IRA funds, it would be deemed a contribution to your IRA and that would bust your plan.

If you already have such investments in your SEPP, discuss with the custodian how they will handle things in the event the $1,000 limit is breached. Ask if they will complete the filing and what the charge will be and also to
confirm that neither amount will be included on the 1099R.

2011-08-30 16:46, By: Alan S., IP: [67.61.144.221]

L4: paying taxes in an IRA and SEPP plans
>I’m with DLZ in questioning your need to pay taxes for a MLP held within
>an IRA since all IRA activity is tax deferred until funds are distributed.
I agree with Jim and Dlz on this and would add that when distributions do occur from a T-IRA, all of the money distributed is taxed at regular income tax rates. This is the primary “Gotcha!” with a T-IRA… there are no tax-preferred capital gains rates…
everything is taxed as income, unless there is some form 8606 basis involved for any after-tax contributions that may have been made.
2011-09-02 01:44, By: Ed_B, IP: [71.236.183.224]

L5: paying taxes in an IRA and SEPP plans
Ed,
If the UBTI exceeds $1,000, the IRA and IRS will receive a K1 showing that income and the IRS will expect that a 990 T is filed for the IRA and the taxes paid at the rates that generally apply to trusts and estates, ie the rates
are much higher than individual tax rates. Moreover, the taxpayer CANNOT pay this tax bill because it would be deemed a contribution to the IRA since it would constitute an IRA expense. The amount of tax must come directly out of the IRA. On the plus side
this tax is not considered an IRA distribution so will not bust the SEPP, however it will obviously erode the IRA balance along with the fee to prepare the 990 T return. Here is some further info on this from Pensco, a leading IRA custodian for self directed
(alternative investments) IRAs:
http://www.penscotrust.com/investing/realEstate/UBTI.aspx
2011-09-02 02:35, By: Alan S., IP: [67.61.144.221]

L6: paying taxes in an IRA and SEPP plans
Alan:
I don’t think that any of us was recommending this investment for a an IRA running a SEPP and for the very reasons you mention. The complications thatare added seem significantly greater than the reward gained for having it. At least, that is my perception.
Having done a significant amount of estate planning, I amawarethat the estate taxhas a much higher rate than the individual tax rate. This is why it is usually best to distribute an estate as rapidly as possible, minimizing the timewherein the estate
can earn income and thereby the amount of income earned.
I appreciate the point about the taxpayer not paying the tax on the investment earnings directly, which would bust the SEPP via a contribution. I thought that might be the case but did not know for sure.
2011-09-02 06:38, By: Ed_B, IP: [71.236.183.224]

L6: paying taxes in an IRA and SEPP plans
Alan S:
Thanks for the link to Pensco and their informative description of this situation. I must admit that this old dog has learned a new trick. I knew “alternative investments” like physical real estate could be held in an IRA and that it carried some really
weird complications. The only alternative investment I have dealt with within IRA’sis non-traded REIT’s, and they are straight forward like stocks and mutual funds.
Thanks again for the description and link.
Jim F
2011-09-02 14:15, By: Jim F, IP: [70.167.81.119]