How are preferred stock dividends taxed in a Master Limited Partnership (MLP) held within an IRA?

You're right to be concerned. Unfortunately, preferred units in a Master Limited Partnership like Energy Transfer are generally treated the same as common units for tax purposes when held in an IRA. This means they can potentially generate Unrelated Business Taxable Income (UBTI). The key issue is the underlying business structure of MLPs, not the type of security itself. Since MLPs are pass-through entities, the income they generate - whether distributed to common unitholders or preferred unitholders - typically maintains its tax character. If the MLP's operations generate UBTI, that flows through to all types of unitholders. When UBTI exceeds $1,000 in a tax year within your IRA, the IRA itself (not you personally) would need to file Form 990-T and potentially pay taxes. This creates an administrative headache and potential tax liability within an account that's supposed to be tax-advantaged.

After facing similar issues with MLPs in my retirement accounts, I discovered taxr.ai (https://taxr.ai) which was a lifesaver for sorting out my UBTI problems. I uploaded my K-1 forms and account statements, and their system immediately flagged this exact issue with preferred MLP units in my IRA. The tool explained that while preferred units generally have more predictable distributions than common units, they're still partnership interests that pass through UBTI. It even calculated my potential tax liability and helped me understand what documentation my IRA custodian would need to properly file Form 990-T.

I was initially dubious about taxr.ai when I saw it mentioned here, but I gave it a try with my Energy Transfer preferred units situation. Surprisingly helpful! The analysis confirmed my preferred units were indeed generating UBTI in my IRA, but broke down exactly how much and why. The tool identified which specific income categories from my K-1 were contributing to UBTI, something I couldn't figure out from just reading the form. It explained that about 65% of my distributions were actually coming from business activities that generate UBTI when held in an IRA. What I really appreciated was that it showed me the math behind the calculations instead of just giving me a number to trust blindly.

After struggling to get answers from both my broker and the IRA custodian about my MLP tax situation, I finally used Claimyr (https://claimyr.com) to get through to an actual IRS agent. They have this service where they navigate the IRS phone tree for you and get you connected to a live person - you can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The IRS specialist confirmed that preferred MLP units do indeed generate UBTI when held in an IRA, just like common units. They explained that the IRA itself would need to file Form 990-T if UBTI exceeds $1,000 in a tax year, and recommended I contact my IRA custodian about their procedures for handling this filing. Saved me hours of hold music and transfers!

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself because I was getting nowhere with my MLP questions. I got connected to an IRS tax law specialist in under 45 minutes (versus the 3+ hours I spent on previous attempts). The agent confirmed exactly what others here said - preferred units in MLPs are treated the same as common units for UBTI purposes when held in an IRA. They directed me to specific sections in Publication 598 that address UBTI in tax-exempt organizations, which applies to IRAs. The agent even explained that my IRA custodian is responsible for filing Form 990-T, but I need to inform them about the UBTI and provide the necessary documentation. Definitely worth using the service instead of wasting more days trying to get through.

For what it's worth, I learned this lesson the hard way last year with MPLX preferred units in my Roth IRA. My custodian charged me a $300 fee to file the 990-T plus the tax payment itself. I've since moved all my MLP investments (both common and preferred) to my taxable brokerage account. While you do pay taxes on the distributions in a taxable account, at least you benefit from the return of capital portion reducing your tax basis. Plus you avoid the UBTI headache altogether. The tax treatment in a regular account is actually one of the advantages of MLPs - tax-deferred distributions that reduce your basis instead of being immediately taxable.

Has anyone considered just calling Energy Transfer's investor relations department directly? I had a similar question about their preferred units last year and they sent me a detailed breakdown of what portion of distributions typically creates UBTI. It varies year to year but they could give you historical percentages.

Thanks everyone for sharing your experiences - this has been incredibly helpful! Based on all the responses, it's clear I did mess up by not researching this beforehand. The consensus seems to be that preferred MLP units generate UBTI just like common units when held in an IRA. I'm going to take a multi-pronged approach: first, I'll call Energy Transfer's investor relations to get their historical UBTI breakdown as Maria suggested. Then I'll contact my IRA custodian to understand their process for handling Form 990-T filings and any associated fees. Given what Zoe mentioned about the $300 filing fee plus potential taxes, I'm seriously considering moving these holdings to my taxable account before the UBTI becomes a bigger issue. The tax-deferred nature of MLP distributions in a regular brokerage account actually sounds more advantageous than dealing with UBTI complications in my retirement account. Has anyone here successfully transferred MLP units from an IRA to a taxable account, or would that be considered a distribution that triggers immediate tax consequences?

I've been through this exact situation with Energy Transfer preferred units in my IRA. Here's what I learned from my experience: First, yes - preferred MLP units absolutely generate UBTI just like common units. The partnership structure means all the income flows through with its original tax character intact, regardless of whether you hold common or preferred units. Second, don't panic about the immediate impact. In my case, the actual UBTI from Energy Transfer's preferred units was around $800 last year, which stayed under the $1,000 threshold that triggers Form 990-T filing requirements. The key is understanding that not 100% of your distributions will be UBTI - it depends on the underlying income sources of the MLP. Third, I'd strongly recommend getting your hands on last year's K-1 for Energy Transfer (you can usually find these on their investor relations website) to see the historical breakdown of income types. This will give you a realistic picture of what to expect rather than worrying about hypothetical worst-case scenarios. Finally, regarding transferring out of your IRA - as others mentioned, you can't do a direct transfer. But before taking a taxable distribution, wait to see your actual tax impact. The filing fees and potential taxes might still be less costly than the immediate tax hit and loss of tax-advantaged space in your retirement account.