When you invest in a traditional individual retirement account (IRA), you get a tax deduction for the money you put in and then pay taxes when you take the money out.

Money inside the IRA grows tax-free (or tax-deferred, technically, because it’s taxable when you take it out of a traditional IRA).

But here is one big exception: some IRAs have to pay UBIT.

What Is UBIT?

UBIT is short for “unrelated business income tax.” It is a tax imposed on tax-exempt entities, such as IRAs, that engage in certain types of businesses. It was originally enacted in 1950 for tax charities—501(c)(3) organizations—that ran businesses unrelated to their charitable purposes.

Congress felt it was unfair to require ordinary businesses to compete with tax-exempt organizations. UBIT helps level the playing field. For example, a non-profit museum that runs a bakery would have to pay UBIT on its profits just like other bakery owners do.

Most people are unaware that UBIT can also apply to IRAs, including traditional IRAs, Roth IRAs, SEP-IRAs, and SIMPLE IRAs.1 This is because IRAs are tax-exempt trust entities whose purpose is to help individuals save for retirement, not allow them to ... Log in to view full article.