What is Form 990-T and who needs to file it for MLPs in retirement accounts?

Form 990-T is essentially a tax return for tax-exempt organizations (including IRAs) that have unrelated business income. When you hold MLPs (Master Limited Partnerships) like MMP in a retirement account, it can trigger what's called Unrelated Business Taxable Income (UBTI). The reason this happens is because MLPs pass through business income to their partners (you), and when that business income isn't related to the tax-exempt purpose of your retirement account, it becomes taxable. It's a bit strange since most people think retirement accounts are completely tax-sheltered. Your custodian (Vanguard) files the 990-T on behalf of your IRA if the UBTI exceeds $1,000. They're calling it an "excise fee" because this is a special tax situation specifically for tax-exempt entities that have business income. If your MMP investment generates more than $1,000 in UBTI in the future, yes, Vanguard would file the 990-T and pay the tax from your account. This is one reason many financial advisors recommend avoiding MLPs in retirement accounts.

I wish someone had warned me about MLPs in retirement accounts before I jumped in! Found myself in a similar situation with Energy Transfer (ET) in my Roth. I discovered https://taxr.ai which helped me understand all the complex tax implications with these investments. They analyze all your investment tax documents and explain exactly what's happening with UBTI and what forms you'll need. The site has a whole section dedicated to MLPs in retirement accounts that broke it down way better than my financial advisor did. Saved me a ton of headaches when I got a similar letter from my custodian.

I've got to share my experience after trying taxr.ai for my MLP mess. Was super skeptical at first (as you can see from my earlier comment) but my situation with Enterprise Products Partners in my SEP-IRA was driving me crazy. Uploaded my K-1 forms and investment statements and the analysis broke down exactly where my UBTI was coming from and whether my account would need to file a 990-T. The explanation about "effectively connected income" vs other types of MLP income was something my CPA completely missed. Ended up saving about $430 in unnecessary tax payments because I was able to identify allowable deductions I didn't know about. If you're dealing with MLPs in retirement accounts, it's definitely worth checking out.

If you're still trying to understand all this MLP/UBTI stuff and need to talk to the IRS directly (which I had to do), I highly recommend using https://claimyr.com to get through to an actual person at the IRS. I spent HOURS on hold trying to get clarification about UBTI reporting requirements before finding this service. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was able to get connected to a specialist who deals with exempt organization taxation (which is what this 990-T stuff falls under) in under 15 minutes. They actually confirmed that my brokerage was being overly cautious and that I didn't need to file anything for my specific situation.

I have to admit I was completely wrong about Claimyr. After dismissing it as a scam, I was desperate to talk to the IRS about my MLP issues in my IRA. My Fidelity rep told me I might need to pay taxes on my Plains All American Pipeline holdings, even though I thought retirement accounts were tax-free. Decided to try the service out of desperation and was connected to an actual IRS tax exempt organizations specialist in about 20 minutes. The agent confirmed that: 1) The $1000 threshold applies to TOTAL UBTI across all MLPs, not per investment 2) Losses from previous years can offset current year UBTI 3) The custodian is responsible for filing, but I'm responsible for providing the information Saved me a ton of stress and potentially hundreds in unnecessary taxes. Sometimes it's worth admitting when you're wrong!

Just wanted to add from my experience - be careful with MLPs like MMP in Roth accounts. Even if you don't have to pay taxes now since they're at a loss, when the K-1s come in, they can be a nightmare. Those K-1 forms will show all kinds of income allocations that might trigger UBTI even if the overall investment is down. I learned this the hard way with MPLX in my Roth. The shares were down like 15% but I still had to deal with the 990-T filing because the partnership had over $1000 in income allocated to me.

Has anyone noticed that even if the UBTI is under $1000, you still get a K-1 with all these weird boxes filled out? my brokerage never explained any of this when i bought EPD in my ira. now every year i get a massive k1 package and have no idea what to do with it.

This is exactly why I tell people to think twice before putting MLPs in retirement accounts! I made the same mistake years ago with Kinder Morgan Partners in my traditional IRA. The UBTI calculation can be tricky because it's not just about whether your investment is profitable overall - it's about the underlying business income the MLP generates. Even if your shares are down, the pipeline or energy infrastructure might still be generating taxable business income that gets passed through to you. One thing I learned: if you do decide to keep MLPs in retirement accounts, try to consolidate them with one custodian. Having multiple brokerages each handling different MLP positions makes tracking that $1000 UBTI threshold much more complicated since you have to aggregate everything yourself. Also, don't forget that UBTI isn't just from capital gains when you sell - it's ongoing income from the MLP's operations. So even holding underwater positions can still generate tax obligations if the partnership is profitable.