Using IRA for private equity fund investment- Is every penny earned UBTI?

Submitted by philip berens on Thu, 2019-05-02 17:10

I would like to invest thru my IRA (with a custodian) in a private equity fund- this fund invests in operating businesses of all sorts, but not real estate or other exempt from UBTI businesses. Mainly construction contractors, restaurants, etc. which are definitely “trade or business activies” and “not substantially related to exempt status” which IRS considers UBTI. But it is structured as a Limited Partnership(s) which buys an interest in the operating businesses which are themselves LLCs or Sub S. My question is would every penny of my income from the fund/LP be UBTI since the LP is investing in companies that are running operating businesses, or would the “twice removed” aspect help? Pretty sure I know the answer already, but want to make sure, Thanks,.



Submitted by Alan - IRA critic on Thu, 2019-05-02 20:02

Not sure. Since the custodian normally files the 990T and will hold these investments, they should have a good idea of the expected amount of UBTI. Also, note that any negative UBTI can no longer be netted against positive UBTI for another holding. That will increase the chance of UBTI exceeding 1000.

Submitted by philip berens on Thu, 2019-05-02 20:30

Thanks but I should have mentioned the custodian is one of those “custodians for hire” trust companies for self directed IRAs.  I will just be running the money thru them to get to the investment fund, but they won’t know much about it at all.  As for the netting of negative vs. positive, these guys have a good track record over 20 years and will certainly be profitable- and I am pretty sure it will all be UBTI as I said above, which is bad news- but I don’t have enough free funds out of my ira for their high min investment.

Submitted by Alan - IRA critic on Fri, 2019-05-03 23:55

  • Be sure you actually have a valid IRA account here. The following paragraph by Natalie Choate describes the exposure if you do not:
  • “A. Direct ownership of “IRA” assets (no custodian)In order to have a valid IRA, the IRA’s assets must be held by a BANK (or other institution that has gone through the IRS process for obtaining approval to hold IRA assets) as custodian or trustee. § 408(a)(2). An individual can NOT hold direct title to assets that are supposedly in his IRA. Thus, the title of a partnership unit held by an IRA should be “[Name of bank], as custodian [or trustee] of [name of participant] IRA.” This requirement can be easily overlooked when the IRA owner wants to invest in a hedge fund, LLC, or other private investment vehicle. The hedge fund accepts money that is supposed to be a rollover from an actual IRA or plan, deposits the money in its fund, and opens an account entitled “John Doe IRA.” Because there is no bank holding title to the account, however, this investment is not “in” an IRA; it is owned by John Doe directly. The result is either that the money never gets into an IRA in the first place, or (if the money came out of a retirement plan and was supposedly “rolled over” into this new investment) there is no valid rollover, and thus there is an Unintended Distribution. See È2.5. For rulings in which this mistake happened (and the IRS allowed it to be fixed via a waiver of the 60-day rollover deadline; see È3.5), see PLRs 2007-37047, 2007-37048, 2009-19066 (real estate limited partnership), 2009-21038 (limited partnership), 2009-31063 (investment pool); 201005058; 2011-04053–04056; 2011-04058–04060; and 2011-38051, 2011-38052, and 2011-39012.A. “

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