Which type of investment can potentially generate taxable income in retirement accounts?

Master Limited Partnerships (MLPs) are a specific type of investment that can generate taxable income within retirement accounts. These entities typically operate in the natural resources sector and are structured to provide tax advantages to investors. However, when MLPs are held in tax-deferred accounts, such as IRAs or 401(k)s, the income derived from them is generally considered unrelated business taxable income (UBTI). This can lead to tax liability on the income generated when it exceeds a certain threshold, even though the retirement account is meant to defer taxes until withdrawal.

In contrast, stock mutual funds, municipal bonds, and Exchange-Traded Funds (ETFs) are less likely to produce taxable income in retirement accounts. For instance, stock mutual funds may distribute capital gains, but these would be tax-deferred within the retirement account until withdrawal. Municipal bonds are usually exempt from federal income tax and thus wouldn’t generate taxable income in retirement accounts. As for ETFs, similar to mutual funds, any capital gains distributions would be tax-deferred in a retirement account context.

In summary, MLPs uniquely stand out because they can create taxable income in retirement accounts due to their structure and the nature of their income, making the answer particularly relevant for investors looking to understand the