Author Topic: Withholding in my Roth? Tax gurus please!  (Read 456 times)

MissNancyPryor

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Withholding in my Roth? Tax gurus please!
« on: October 11, 2019, 04:51:23 PM »
I owned some Energy Transfer Partners until last year.  They always had a good dividend but I decided to dump them out of all accounts when I got weary of waiting forever each spring for the damn K-1 forms and having to deal with that bit of hassle each year for taxes in my non-retirement brokerage account.  One of the accounts where I had that name was my Roth and I just let them simmer along for years until I dumped them in 2018.

Vanguard asked me this summer for cost basis info for Energy Transfer (they lacked it because I was with Scottrade before my divorce).  I provided it, thinking it was odd that the word 'taxes' and 'Roth' were in the same sentence.  Whatevs, I thought they were doing account cost basis as a housekeeping thing as I have seen done and didn't think much of it. 

Now, Vanguard has zapped my Roth account for several hundred dollars for "withholding" and mentioned they filed the form 990-T as required by October 15th. 

Wut? 

I presume this is because while I owned ETP in the Roth it still is a partnership and therefore I am on the hook for my part of their gain, much like I had to show my part in my taxable brokerage account with my K-1 filing annually.  The Roth does not shelter me from that.  Guessing there. 

Anyone familiar with this?

I am so glad I dumped them, they along with Magellan were just pains in the ass even though I liked the dividends.

secondcor521

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Re: Withholding in my Roth? Tax gurus please!
« Reply #1 on: October 11, 2019, 10:12:22 PM »
I don't know about this firsthand, and I'm not tax guru, but from what I read here:

https://ttlc.intuit.com/community/retirement/discussion/what-do-i-report-for-an-lp-in-a-roth-ira/00/628767

The essence of it - as I read it - is that ETP is mainly an energy company but they own something unrelated that is profitable.  That something unrelated produces something called unrelated business taxable income (UBTI).  From the sounds of it, Vanguard (as your IRA custodian) is required to file a Form 990-T if your Roth IRA's portion of the UBTI is more than $1,000.  And apparently you'll owe those taxes on it even though it's in your Roth.

I'm guessing that Vanguard's taking withholding from your Roth is to pay for the taxes you owe on this UBTI.  I'm guessing that any income attributable to your portion of ETP because of this UBTI will be distributed to you at some point if it hasn't already.  That means even though you sold it, you may get one last K-1 from them next spring.

It seems like you could (a) ask for a copy of the Form 990-T, and (b) use the withholding from the Roth on your 2019 tax return to offset your tax liability.  But I'm guessing on both those points.

SeattleCPA

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Re: Withholding in my Roth? Tax gurus please!
« Reply #2 on: October 12, 2019, 07:49:24 AM »
I think the surprise here is that if an IRA or 401(k) invests in an unincorporated business or a leveraged real estate venture, it owes taxes on the income (called unrelated business income) and files its own tax return, a 990-T.

This epiphany is always a surprise to people (advisers, investors, etc) who've gotten out beyond the frontier of their investment and tax knowledge.

Kudos to Vanguard to filing the 990-T for you. Often the custodians in my experience ignore this requirement and leave it to the IRA or 401(k) owner.

MissNancyPryor

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Re: Withholding in my Roth? Tax gurus please!
« Reply #3 on: October 12, 2019, 03:05:48 PM »
Thank you both.  This is a pretty specific topic and I doubt it will bring many other comments but I sure appreciate your chiming in. 

I have sent the specialist at VG an e-mail as well to clarify.