Definition
Unrelated business taxable income is income earned inside a tax-exempt account, such as an IRA, that can be taxable despite the account's usual tax shelter.
How It Works
When a retirement account invests in an operating business or uses debt-financed investments, the resulting income can be UBTI and taxed even inside the IRA. It commonly arises with leveraged real estate or certain partnership investments held in retirement accounts.
Example
An IRA that invests in a debt-financed partnership generates UBTI, which is taxed even though the account is otherwise tax-deferred.
Who It Applies To
Owners of self-directed IRAs and other tax-exempt accounts investing in operating businesses or leveraged assets.
Watch-Outs
UBTI can create an unexpected tax bill and filing requirement inside an account most people assume is fully sheltered, so structure matters before investing retirement funds in these assets.
