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MLP Investing in an IRA account
Old 04-11-2016, 12:27 PM   #1
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MLP Investing in an IRA account

I recently invested in a MLP (master limited partnership) within my IRA account at Schwab. I could never get a very good read on the downside of such investing, since most advise that the K-1 flow down creates too much work and results in more taxes etc. Such 1/2 truths could make folks miss some fair opportunities for higher yielding investments. The following article clarified this much better for me;
seekingalpha.com/article/882601-dont-be-afraid-to-put-mlps-in-your-ira

I am curious if others are holding MLP shares in their IRA accounts and have any regrets or positive comments for doing so. The $1000 UBTI limit seems to not create that much of a concern for taxes, particularly if it is the total UBTI of the IRA including shares with negative sums.
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Old 04-11-2016, 01:29 PM   #2
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I have several MLP investments, but all are in taxable accounts. Given a small number of accounts, I feel that the tax preparation issues are small enough to not be a block. I have accepted that to make these better than average investments I more or less have to avoid ever selling, because all that depletion comes roaring back to bite you on the way out.

Also, holding these shares in qualified accounts does create other potential tax issues, and this would represent an additional learning curve separate from the one I have already gone through. I do use my Roth to hold my one Royalty trust. This is mainly to not have to deal with any out-of-my-state state-tax issues, also to make share re-investment seamless.

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Old 04-11-2016, 03:16 PM   #3
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Heads up and for those that may not or may have run into this yet.

I used to hold some MLP's in my IRA's as well as some Limited Partnerships. I sold out of the MLP's at the start of the oil bust but still held some LLP's.

Just this year and for the first time, I received a letter from brokerage that stated they were being held more responsible by the IRS for reporting UBTI (Unrelated Business Taxable Income) for assets such as MLP's, LLP's and S Corps held in IRA accounts. Evidently there was a word change regarding this responsible by the IRS in the tax law. They further stated if I had more than $1,000 in UBTI they were going to file a tax return on Form 990-T for my IRA's, charge me for doing the tax filing and deduct any taxes owed out of my IRA. (the charge would not start until 2016, giving me a chance to liquidate any such positions should I choose to do so). Shocked the heck out of me.

Evidently the IRS does not consider UBTI investment income and they want their tax dollars….even if it is in an IRA.

I went round and round with brokerage about "why" they thought is was ok to file a tax return on my IRA when I already had a CPA (friend) doing my taxes, the responsibility for my taxes, the change by the IRS, "what the heck, this is an IRA! type conversation, etc., etc.

So bottom line, at this point when I buy MLP's or other assets that will spin off UBTI, I will be doing so in my taxable account.

I don't know if you are able to see a year end distribution statement for this MLP you purchased but might be worth knowing how much UBTI they spun off and if you will be affected by this going forward.
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Old 04-11-2016, 09:13 PM   #4
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For years I have held MLPs in my IRA, and still do. Schwab, the custodian, has been filing the 990-T for me after I mail them the K-1's. No big deal. They then send me a copy of the 990-T that was filed.
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Old 04-11-2016, 09:41 PM   #5
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Quote:
Originally Posted by Happyras View Post
I recently invested in a MLP (master limited partnership) within my IRA account at Schwab. I could never get a very good read on the downside of such investing, since most advise that the K-1 flow down creates too much work and results in more taxes etc. Such 1/2 truths could make folks miss some fair opportunities for higher yielding investments. The following article clarified this much better for me;
seekingalpha.com/article/882601-dont-be-afraid-to-put-mlps-in-your-ira

I am curious if others are holding MLP shares in their IRA accounts and have any regrets or positive comments for doing so. The $1000 UBTI limit seems to not create that much of a concern for taxes, particularly if it is the total UBTI of the IRA including shares with negative sums.

I own an MLP etf in my taxable account (i.e. AMLP). It eliminates K-1s. It can be held in an IRA as well and does away with the tax issues. There are ETNs and CEFs also that can do the same.
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Old 04-11-2016, 09:49 PM   #6
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Since it is difficult to know in advance how much UBTI an MLP might generate, if added to an IRA I buy a small number of shares for the first year. After I get the K-1, if the UBTI number is small (in many cases it is negative) I feel safe adding more shares. In my experience the UBTI of a givem MLP does not vary much from one year to the next, but of course that is not guaranteed to be true in subsequent tax years.
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Old 04-11-2016, 10:47 PM   #7
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Quote:
Originally Posted by sheehs1 View Post
Heads up and for those that may not or may have run into this yet.

I used to hold some MLP's in my IRA's as well as some Limited Partnerships. I sold out of the MLP's at the start of the oil bust but still held some LLP's.

Just this year and for the first time, I received a letter from brokerage that stated they were being held more responsible by the IRS for reporting UBTI (Unrelated Business Taxable Income) for assets such as MLP's, LLP's and S Corps held in IRA accounts. Evidently there was a word change regarding this responsible by the IRS in the tax law. They further stated if I had more than $1,000 in UBTI they were going to file a tax return on Form 990-T for my IRA's, charge me for doing the tax filing and deduct any taxes owed out of my IRA. (the charge would not start until 2016, giving me a chance to liquidate any such positions should I choose to do so). Shocked the heck out of me.

Evidently the IRS does not consider UBTI investment income and they want their tax dollars….even if it is in an IRA.

I went round and round with brokerage about "why" they thought is was ok to file a tax return on my IRA when I already had a CPA (friend) doing my taxes, the responsibility for my taxes, the change by the IRS, "what the heck, this is an IRA! type conversation, etc., etc.

So bottom line, at this point when I buy MLP's or other assets that will spin off UBTI, I will be doing so in my taxable account.

I don't know if you are able to see a year end distribution statement for this MLP you purchased but might be worth knowing how much UBTI they spun off and if you will be affected by this going forward.
Here would be my take.... and like always I could be way off....

The brokerage is the trustee.... the trustee is responsible for filing tax returns.... just because you have a friend who could do it does not mean that every account has someone... that would make you a one off and they do not like one offs...

Bottom line, they either have the language in their agreement that they can file taxes or will have very soon....
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Old 04-12-2016, 08:06 AM   #8
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One more thing to note- the UBI is the total in the IRA. I would assume if you have multiple IRA accounts for the same person, these likely should be summed even though the trustees may not be aware of them... but don't know this as a fact.

I would guess holding in an (R)IRA would keep you from paying state taxes for the MLP. Would this also work for MLPs with foreign taxes owed? (not sure if foreign governments recognize (R)IRA.
I don't own any MLPs.. but have been trying to understand them before jumping in.
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Old 04-12-2016, 11:19 PM   #9
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I hold many MLPs ... Exclusively in tax deferred or tax-free accounts. A substantial sum total, I might add.
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