Is K-1 Income Taxable in an IRA? UBTI and Form 990-T Explained

K-1 income is taxable inside an IRA when the K-1 reports unrelated business taxable income (UBTI) or unrelated debt-financed income, and the total from all sources in that IRA reaches $1,000 or more for the year. So yes, K-1 income can be taxable in an IRA, even though the account is otherwise tax-deferred. When the threshold is crossed, the IRA itself must obtain an EIN, file Form 990-T, and pay tax at trust income tax rates from its own cash. The rule applies equally to traditional, Roth, SEP, and SIMPLE IRAs.¹

Why a Retirement Account Ever Owes Tax on This

An IRA is a tax-exempt trust. Dividends, interest, and capital gains inside it are shielded until distribution, and in a Roth potentially forever. Sections 511 through 514 of the Internal Revenue Code carve out an exception: when a tax-exempt entity earns income from an active trade or business, that income is taxed so the exempt entity doesn’t get a free ride against businesses that pay tax on their profits.²

When your IRA holds a partnership interest, the partnership sends a Schedule K-1 reporting the IRA’s share of the entity’s income, losses, deductions, and credits.³ If the partnership runs a business, the IRS treats the IRA as if it were operating that business directly. The resulting income is UBTI and is taxable even though the money never leaves the account.

A second trigger is unrelated debt-financed income. When a partnership borrows to acquire assets, such as real estate bought with a mortgage, the portion of income attributable to that debt becomes taxable inside the IRA. The taxable share is based on the ratio of the average debt on the property to its average adjusted basis during the year.⁴ Passive-looking activity turns taxable once leverage is in the picture.

Which K-1s Actually Cause a Problem

Not every K-1 means tax. The issue clusters around a few investment types:

Master limited partnerships (MLPs). These publicly traded partnerships, concentrated in energy, often generate business income and use leverage, producing both UBTI and debt-financed income.
Private equity and venture capital funds. These typically operate businesses or use debt to acquire companies.
Real estate partnerships with mortgages. The debt-financed portion of rental income is UBTI inside the IRA.
Limited partnerships running active trades or businesses. Any active business flows through to the IRA partner as UBTI.

Standard IRA holdings like stocks, bonds, mutual funds, and unleveraged REITs generally produce only dividends, interest, and capital gains, all of which remain sheltered. The K-1 itself is not the problem. The type of income it reports is. To find the number that matters, look at Schedule K-1 Box 20 with Code V, which reports the IRA’s share of UBTI.³

The $1,000 Threshold and Specific Deduction

Two separate $1,000 rules work in the IRA’s favor. First, Form 990-T is only required when gross UBTI from all sources in a single IRA reaches $1,000 or more for the year.¹ Three partnerships generating $250 each add up to $750 and require no filing.

Second, when tax is actually calculated, the IRA gets a specific deduction of $1,000 against its UBTI.⁵ An IRA with $1,200 in gross UBTI has to file, but pays tax on only $200 before other allowable business deductions.

The threshold is per IRA. Own a traditional IRA and a Roth IRA? Each is a separate trust with its own $1,000 threshold and its own filing obligation.¹ Roth IRAs get no exemption from UBTI; the tax-free treatment on qualified distributions doesn’t override these rules.

The Tax Rate Is a Trust Rate

Because IRAs are trusts, UBTI is taxed at trust and estate rates.² Those brackets are compressed and reach the top rate quickly. For tax years beginning in 2026:⁶

10 percent on UBTI up to $3,300
24 percent on UBTI from $3,300 to $11,700
35 percent on UBTI from $11,700 to $16,000
37 percent on UBTI over $16,000

These rates apply after the $1,000 specific deduction and any other allowable deductions. Even a modest amount of UBTI can hit high marginal rates.

Filing Form 990-T

The IRA Needs Its Own EIN

Each IRA that has to file Form 990-T needs its own employer identification number. Using your Social Security number leads to processing errors and IRS notices.¹ Apply on Form SS-4, checking “Other” for entity type and noting the EIN is for an IRA trust filing Form 990-T.⁷ The IRS also accepts EIN applications online or by phone.

Your Custodian Signs, Not You

Form 990-T is signed by the IRA’s custodian or trustee, not the account owner. The IRS treats the custodian as trustee for this purpose.¹ Some custodians prepare and file the return for you. Others expect you to hire a tax preparer and route the finished return through them for signature. Check with the custodian early. K-1s often arrive late in the season, and the deadline arrives fast once they do.

Deadline

Form 990-T is due by the 15th day of the fourth month after the end of the IRA’s tax year, which is April 15 for calendar-year accounts.¹ Extensions are available for the return, but any tax owed is still due by the original date.

The Tax Comes Out of the IRA

The tax belongs to the IRA, not to you personally. It has to be paid from the IRA’s own cash. Paying it with outside money can be treated as a prohibited transaction under Section 4975, an improper transfer of value between you and the account.⁸ A prohibited transaction can disqualify the IRA entirely, causing the whole account balance to be treated as a taxable distribution as of the first day of the year.

Keep enough cash in the IRA to cover any expected UBTI tax. If the account is loaded with illiquid partnerships, plan ahead: hold a cash reserve, or make sure the partnership will distribute enough cash when the bill comes.

Estimated Tax Payments During the Year

If the IRA’s UBTI tax for the year is expected to be $500 or more, quarterly estimated payments are required.⁹ Payments are made through EFTPS using the IRA’s EIN, on the standard quarterly schedule: April 15, June 15, September 15, and January 15 of the following year. Missing them produces interest and underpayment penalties, all paid from the IRA’s assets.

When the IRA Holds More Than One Partnership

Multiple partnerships cannot be lumped into a single net UBTI figure. Under Section 512(a)(6), each unrelated trade or business is tracked separately, and a loss from one partnership’s business cannot offset income from another for the same year.¹⁰ Each business starts at zero; no negatives cross over.

A qualifying partnership interest (QPI) is the exception: QPIs can be grouped and treated as a single trade or business. An interest qualifies if the IRA holds no more than 2 percent of both profits and capital, or no more than 20 percent of capital without controlling the partnership.¹⁰ Most IRA holders of publicly traded MLPs clear the 2 percent test easily and can aggregate.

A net loss from a particular business inside the IRA doesn’t vanish. It carries forward against future UBTI from the same business. The Tax Cuts and Jobs Act removed carrybacks, and the deduction in a later year is limited to 80 percent of that business’s taxable income for the carryforward year. You are not required to file Form 990-T in years when gross UBTI is under $1,000 just to preserve a carryforward.¹

Penalties for Filing Late or Paying Late

Form 990-T carries the standard tax-return penalty structure. The failure-to-file penalty is 5 percent of unpaid tax per month or part of a month, capped at 25 percent. A return more than 60 days late carries a minimum penalty of the lesser of the tax due or $525.¹

The failure-to-pay penalty is a separate 0.5 percent per month of unpaid tax, also capped at 25 percent. Both can accrue at the same time, with interest on top. Every dollar of penalty and interest comes out of the IRA, reducing the retirement money the account is meant to hold.

1
Internal Revenue Service. Instructions for Form 990-T
2
Office of the Law Revision Counsel. 26 U.S. Code 511 – Imposition of Tax on Unrelated Business Income
3
Internal Revenue Service. Partners Instructions for Schedule K-1 Form 1065
4
Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income
5
Office of the Law Revision Counsel. 26 U.S. Code 512 – Unrelated Business Taxable Income
6
Internal Revenue Service. 2026 Adjusted Items – Tax Rate Tables for Estates and Trusts
7
Internal Revenue Service. Instructions for Form SS-4
8
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
9
Internal Revenue Service. Estimated Tax – Unrelated Business Income
10
Federal Register. Unrelated Business Taxable Income Separately Computed for Each Trade or Business