Holding a Master Limited Partnership in an IRA can trigger a tax bill inside the retirement account itself. The operating income an MLP passes through to its unitholders counts as unrelated business taxable income (UBTI) when the unitholder is a tax-exempt entity like an IRA, and UBTI is taxed at trust rates that hit 37% at just $16,000 of taxable income in 2026. The tax comes straight out of the IRA’s assets.
Why MLP Income Gets Taxed Inside a Tax-Sheltered Account
MLPs are publicly traded partnerships, not corporations. To keep partnership treatment, an MLP has to earn at least 90% of its gross income from qualifying sources, which for most MLPs means pipelines, gas processing, crude storage, and similar energy infrastructure work.1Office of the Law Revision Counsel. 26 U.S.C. 7704 – Certain Publicly Traded Partnerships Treated as Corporations Income, deductions, and losses flow through to each unitholder on a Schedule K-1.
The tax code imposes a tax on any income a tax-exempt entity earns from a trade or business unrelated to its exempt purpose.2Office of the Law Revision Counsel. 26 U.S.C. 511 – Imposition of Tax on Unrelated Business Income of Charitable, Etc., Organizations An IRA exists to fund retirement, not to operate pipelines. When an IRA owns MLP units, it is a limited partner in that active business, and its share of the operating income is UBTI.
The code does exclude dividends, interest, royalties, and most capital gains from UBTI.3Office of the Law Revision Counsel. 26 U.S.C. 512 – Unrelated Business Taxable Income That is why regular stocks, bonds, and REITs in an IRA cause no trouble. MLP operating income falls into none of those buckets. Pipeline fees, processing revenue, and storage charges are active business income, so nearly all of the taxable income an MLP reports lands in the IRA as UBTI.
This rule applies to every flavor of IRA: Traditional, Roth, SEP, and SIMPLE. A Roth is arguably the most painful place to hold an MLP, because the money the IRA pays in UBTI tax would otherwise have grown and come out entirely tax-free.
The $1,000 Threshold and Who Files
An IRA is not on the hook for UBTI tax on every dollar. The code allows a $1,000 specific deduction in computing UBTI, and the IRS requires Form 990-T only when gross unrelated business income reaches $1,000 or more.4Internal Revenue Service. Instructions for Form 990-T (2025) Below that, nothing is filed and nothing is owed.
The threshold applies per IRA, not per position. Three MLPs each throwing off $400 of UBTI in the same IRA total $1,200 and require a return. Your share of UBTI is reported on the K-1 the MLP issues, in Box 20 under Code V.5Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025) – Section: Box 20. Other Information
The IRA custodian is responsible for tracking UBTI across the account, obtaining a separate EIN for the IRA, and filing Form 990-T when the threshold is crossed. The IRS treats custodians as trustees for this purpose.4Internal Revenue Service. Instructions for Form 990-T (2025) The return is due April 15, with a six-month extension available, though any tax owed is still due on April 15.
Not every custodian handles this the same way. Some file automatically. Some require you to send in the K-1s and authorize the filing. Some refuse to touch it and leave you to hire a CPA who works on exempt-organization returns. If you hold MLPs in an IRA, ask your custodian how they handle 990-T before tax season, not during.
Trust Rates: The Reason This Hurts
The IRA does not pay tax on UBTI at your personal rate. It pays at trust and estate rates, the most compressed brackets in the federal code. For 2026:
- 10% on taxable income up to $3,300
- 24% on taxable income from $3,300 to $11,700
- 35% on taxable income from $11,700 to $16,000
- 37% on taxable income over $16,0006Internal Revenue Service. 2026 Form 1041-ES – Estimated Income Tax for Estates and Trusts
An individual single filer does not reach the 37% bracket until taxable income exceeds roughly $609,000. An IRA holding MLPs reaches it at $16,000. After the $1,000 specific deduction, $17,000 of net UBTI already has income taxed at the top rate.
The tax is paid from the IRA. If the account is fully invested and short on cash, the custodian may sell holdings to cover the liability, which can force a sale of MLP units or other positions at the wrong moment.
Selling the Units Doesn’t Necessarily Solve It
Capital gains are generally excluded from UBTI, so you might expect a clean exit when you sell MLP units inside an IRA. The debt-financed income rules complicate that. Under Section 514, if a tax-exempt entity holds property financed with borrowed money, a share of the income and gain from that property gets pulled into UBTI based on the ratio of debt to the property’s adjusted basis.7Office of the Law Revision Counsel. 26 U.S.C. 514 – Unrelated Debt-Financed Income
MLPs carry significant debt because pipelines and processing plants are capital-intensive. A share of that acquisition indebtedness is allocated to each unitholder. For the IRA, that means two things. First, some income that would otherwise be excluded can be reclassified as UBTI. Second, when you sell the units, the portion of the gain tied to debt-financed property can be treated as UBTI even though ordinary capital gains would not be. A sale can push total UBTI over $1,000 in the year of the sale and trigger both a filing and a tax bill, even if operating income by itself never crossed the line.
What Happens If the 990-T Doesn’t Get Filed
Miss the filing when it was required and the penalties stack. The late-filing penalty is 5% of the unpaid tax for each month or partial month the return is late, capped at 25%. A return more than 60 days late carries a minimum penalty of $525 or the full tax due, whichever is less.8Internal Revenue Service. Instructions for Form 990-T (2025)
Late payment adds another 0.5% per month, also capped at 25%, and interest runs on both penalties from the original due date.8Internal Revenue Service. Instructions for Form 990-T (2025) If the IRA expects to owe $500 or more in UBTI tax for the year, it also has to make quarterly estimated payments. Skipping those brings a separate underpayment penalty.9Internal Revenue Service. Estimated Tax: Unrelated Business Income
The custodian carries the legal filing duty. The money still comes out of your retirement savings.
Better Ways to Get MLP Exposure Inside an IRA
If the UBTI mechanics sound like more trouble than the yield is worth, there are cleaner routes to the same underlying assets.
Hold MLPs in a taxable brokerage account instead. The pass-through structure works in your favor there: distributions are largely return of capital that reduces your cost basis, deferring most tax until you sell. You handle K-1s at tax time, but UBTI never enters the picture because a taxable account is not a tax-exempt entity.
Use an MLP ETF structured as a C-corporation. Several MLP ETFs are organized as C-corps rather than partnerships. The fund pays corporate-level tax on the MLP income it receives, so it does not pass UBTI through. You get a 1099 instead of a K-1, and the income stays sheltered inside the IRA. The corporate tax at the fund level creates a drag on returns compared with owning MLPs directly.
Consider an MLP exchange-traded note. ETNs tracking MLP indexes are unsecured bank debt. They do not actually hold MLP units, so no K-1 and no UBTI. Distributions are generally treated as interest, which stays tax-deferred or tax-free inside an IRA. The catch is credit risk: if the issuing bank defaults, you are an unsecured creditor.
Keep direct positions small. If you want the units themselves, sizing the position so total UBTI across all MLPs in the IRA stays under $1,000 avoids both the filing and the tax. That works with one modest holding. It gets harder to manage with several, especially in years where debt-financed income or a sale pushes UBTI up unexpectedly.