Last year, I got hit with a tax penalty for like $6,500 USD. I believe they garnished it out of my Roth. I thought perhaps it was because I didn't wait long enough or something before I sold a position to buy another one. So, I figured it might be a one-off thing, but through the entire year of 2024, I did not sell anything. I only bought more of the same positions.
Anyway, I just received a letter from the IRS again, saying this time I owe $13k+ ! I am flabbergasted. So now, I am trying to figure out just what exactly is this 990-T, and if this is a nightmare I have to visit every year?
So, to the best of my limited abilities, I understand that this penalty is due to me holding MLPs in my Roth IRA account specifically, and my income distributions have exceeded $1k. I thought the whole point of Roth is to be able to generate passive income tax free. Income, I should add that I have not pulled out at all, but rather, have re-invested back into the same positions of that same account.
Assuming all this is not a scam or a mistake somehow, this is a lot of money I am going to be losing every year! I need to figure out what's going on and make it stop!
March 28th, 2025 at 01:22 pm 1743168168
March 28th, 2025 at 01:25 pm 1743168332
March 28th, 2025 at 03:23 pm 1743175418
And yes, this is because of the MLPs in your IRAs. Typically the large custodians will complete the 990-T for you and take the fees from your investment accounts--but this is how it works for my clients at the wealth management firm I work for and I don't know how it works if you are self-managing your investments.
I would consult with a tax advisor or tax-aware financial planner on the most tax-efficient way to move those positions to a brokerage account. The problem is that if those are oil and gas MLPs there is typically depletion recapture and a taxable gain when those positions are sold. But yes, get the MLPs out of your Roth and into a taxable brokerage account. MLPs are typically tax-efficient and often generate losses most years (except when sold), which is why you want them in a brokerage account where if there is a loss, you can take it, rather than in a Roth or a traditional IRA where any tax loss is wasted.
Sorry that you had an expensive lesson!
March 28th, 2025 at 03:26 pm 1743175595
March 28th, 2025 at 04:31 pm 1743179478
March 28th, 2025 at 04:47 pm 1743180448
Dido: My brokerage firm is the one who contacted me and let me know about this. Most of it is indeed the tax. The rest is a combination of interest accrued and late fees.
March 28th, 2025 at 06:58 pm 1743188308
April 1st, 2025 at 05:30 pm 1743528632