The Internal Revenue Service places few restrictions on investments in an individual retirement account. Most notably, IRAs cannot hold life insurance or all but a few collectibles. Partnerships such as limited partnerships and master limited partnerships may be held in IRAs, but you should invest in them with caution. Other partnerships are not specifically excluded from IRAs but are generally not held by IRAs due to complexity and risk.
Problems of Partnerships in IRAs
The IRS taxes unrelated business activities in retirement plans as unrelated business taxable income. Holding a partnership interest in an IRA may result in the loss of tax deferral due to UBTI. This could jeopardize the tax treatment of the entire IRA, not just the partnership interest. Additionally, the IRS does not allow self-dealing in IRAs, which occurs when transactions are not at arms length. Holding a partnership interest in an IRA could be considered self-dealing. The risks associated with trying to hold a partnership in an IRA generally make it unwise.
Limited Partnership Interests
Limited partnership interests are not subject to some of the issues associated with other partnership interests in IRAs. In a limited partnership, the limited partners do not have control and cannot make decisions or execute transactions for the partnership. Limited partnerships in IRAs are subject to UBTI. While this does not exclude them from being held in IRAs, it is advisable to consult with a tax expert before doing so.
- IRS Publication 590: individual Retirement Arrangements
- AAII Journal: The Dos and Don'ts of IRA Investing
- Internal Revenue Service (IRS). "Partnerships." Accessed May 29, 2020.
- Uniform Law Commission. "The Uniform Limited Partnership Act (ULPA) (2001) (Last Amended 2013): A Summary." Accessed May 29, 2020.
- Internal Revenue Service (IRS). "Limited Liability Company (LLC)." Accessed May 29, 2020.
- Internal Revenue Service (IRS). "LLC Filing as a Corporation or Partnership." Accessed May 29, 2020.
Based in upstate New York, Peter Neeves began writing for Demand Studios in 2009, and has a background writing corporate training materials. Neeves attained his Master of Business Administration from IONA College, where he received the Joseph G. McKenna award for academic excellence. He is currently pursuing a Ph.D. at Walden University.