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Attention Employee Benefits Administrators: Alternative Investments Carry Significant Risks

Employees and employers alike have watched their retirement portfolios steadily decline during recent economic times. This decline has increased the popularity of alternative investments in IRA's. Alternative investing with IRA's, however, could lead to unexpected tax consequences.

The term "alternative investments" refers to investments other than investments in "traditional" funds like publicly-traded stocks, bonds, and mutual funds. Some common alternative investments include hedge funds, real estate, venture capital, and derivatives.

One of the benefits of IRA's is that the earnings are not generally subject to income tax. However, certain investments may render some of the IRA's income taxable. This income is referred to as "unrelated business taxable income" or UBTI. One common example of when UBTI can occur is if an IRA invests in a limited liability company (LLC). An IRA that generates UBTI of more than $1,000 must file a tax return. The IRA owner does not have to approve the payment of the tax.

The tax code does contain many UBTI exemptions. This area of law, however, is very complex. If you have questions about IRA investments or are considering investing IRA funds in an "alternative investment," please contact an employee benefits attorney in the Labor and Employment Department at Bingham McHale.



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