MLP's ??

[Ken11]

Context:
I just took a package from megacorp, have salary continuance until early 2011 and will be taking my retirement funds as a lump sum sometime in 2011.

I'll be drawing from taxable and 401K accounts until SS 6 years from now.
I and/or DW will also seek some "low key" income prior to SS as necessary to keep our SWR in bounds.

In 2010 (my last year in the high brackets) I'm focused on reducing taxes. I just found out that recent tightening of the rules will not allow me to avoid NYS income tax on my salary continuance even as I am moving out of state. I had been counting on this.

I have recently been advised to look at MLP's. There are several gas/oil related offerings that allow you to take a tax deduction on 90% of the investment in the year in which it was bought. Afterwards they generate income at reasonable rates and at low risk. I would not put more than 5% of my portfolio into such a thing. However, it seems like a good way to shelter a chunk of income this year.

Comments on MLP's? Any wisdom/input is welcome.

 

[eridanus]

MLPs allow the holder to take a deferred tax break on the distributions, not the investment. For example, if you buy 100 shares of KMP for $6400, that $6400 cost basis is reduced quarterly by ~7%.


Edit: When sold, the tax reporting will be a huge hassle. That's one of the major downsides.

 

[beowulf]

Wouldn't it be easier and safer just paying the tax rather than a tremendous risk that could cost you everything just to avoid taxes? I've seen far too many people make poor investment decision in the name of tax avoidance.

 

[clifp]

I along with several others on the forum own a number of MLPs. They provide a stable stream of income at with yields in the 5-8% range with the prospect of distributions growing at the rate of inflation. The majority of the income is taxed deferred until you sell the MLP. They do not provide any tax deduction on your original investment like you said..

They do complicated your taxes, although programs like TurboTax simplify it greatly and now days you can generally log into the companies websites and directly download all the forms into TurboTax.

The majority of MLP are involved with the distribution and processing of energy (oil, natural gas, propane) and are moderately effected by the oil business. One thing I do like about MLP is the price is pretty stable. The beta (a measure of price volatility) of KMP is .31 for instance.

They are interest and credit rate sensitive however. Both because they are some what of hybrid bond/stock investment and more importantly because MLP depend on the capital market for expansion they can be quite vulnerable to a credit crisis. For instance while 7 of the 8 MLP raised distributions during the last two years one company CrossTex energy (XTEX) eliminated them entirely and was in danger of going out of business due to the credit markets freezing.

Still they are good source of income, and because they can't be owned by mutual funds an investment which you can't get by sticking strictly to index funds.

 

[MasterBlaster]

Credit Suisse's Cushing 30 MLP Index ETN: Now Trading

Credit Suisse's Cushing 30 MLP Index ETN: Now Trading - Yahoo! Finance

 

[clifp]

Credit Suisse's Cushing 30 MLP Index ETN: Now Trading - Yahoo! Finance

Be careful with those things Exchanged Traded Notes are not the same as mutual fund or even an ETF. In particular if Credit Suisse goes under you don't get units in various MLPs instead you get to wait in line with the rest of the banks creditors.

There are several Closed End Funds that invests in MLPs Tortoise Energy (TYG) is the only one I am familiar with I found the fees to be to high for me but YMMV.

 

[jimnjana]

Context:
I just took a package from megacorp, have salary continuance until early 2011 and will be taking my retirement funds as a lump sum sometime in 2011.

I'll be drawing from taxable and 401K accounts until SS 6 years from now.
I and/or DW will also seek some "low key" income prior to SS as necessary to keep our SWR in bounds.

In 2010 (my last year in the high brackets) I'm focused on reducing taxes. I just found out that recent tightening of the rules will not allow me to avoid NYS income tax on my salary continuance even as I am moving out of state. I had been counting on this.

I have recently been advised to look at MLP's. There are several gas/oil related offerings that allow you to take a tax deduction on 90% of the investment in the year in which it was bought. Afterwards they generate income at reasonable rates and at low risk. I would not put more than 5% of my portfolio into such a thing. However, it seems like a good way to shelter a chunk of income this year.

Comments on MLP's? Any wisdom/input is welcome.

Think you might be mixing MLPs with buying an interest in an oil or gas well directly. Never heard of buying an MLP and getting a 90% tax deduction in the year that it was bought. Doesn't sound right at all.

I like MLPs and would recommend them for the portion of your portfolio you are thinking about. To simplify, I would not reinvest distiributions, when/if you sell its easier to calculate gain/loss, and with the tax software today it is really not a big deal.

 

[haha]

I would not reinvest distiributions, when/if you sell its easier to calculate gain/loss, and with the tax software today it is really not a big deal.

Partial sales can be tricky. Professional tax software usually handles it well, but apparently Turbo-Tax has to be tweaked heavily to get it right. During tax season there must have been 150-200 posts on an MLP board that I frequent, asking a very well informed CPA who hangs out there for advice.

With MLPs, I just don't sell. I buy very carefully, and unless I made a boner or things changed radically I will hold until death. I also don't have 1/2 million small postitions; it just isn't worth it. I think about 5 is optimal but I have fewer.

IMO it is very important to get intelligent and conservative management. These things will be going to the equity and debt markets frequently, as they pay out pretty much their entire cash flow. You wnt the LP and the GP if there is a traded one to be very conservatively financed.

For reasons related to this, I also will not buy units in the limited partner. I buy units in the GP, or better yet when the GP is a well financed C corp in the same business I buy the C-Corp if it is reasonably priced. I do have one E&P MLP that I have owned for years, and they have never had a debt or equity offering. I traveled to Dallas to meet with mangement years ago when I got into it, and I have been very pleased with the way they run their business.

Be certain that you understand IDRs before you invest.

Ha