FundRobot » Growth Fund » Is it bad to invest in an Master Limited Partnership using an IRA?

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Old   #1 (permalink)
 
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Default is it bad to invest in an master limited partnership using an ira

I'm trying to understand the rules around buying stock in a Master Limited Partnership (MLP) and whether it is more tax efficient to buy such a stock in a taxable or tax sheltered account?




I'm interested in some stocks of pipeline companies, which happen to be MLPs. I understand that there are tax advantages of MLPs but these advantages come with the price of filling out complicated forms at tax time.

*** If I buy shares of an MLP within my IRA, I assume all of the tax complications disappear. However, if I buy shares of an MLP within my IRA, exactly what tax benefit am I missing out on? ***


I am aware that some MLPs are partially owned by 'general partners' and one can buy stock in either the subsidiary or parent, but I have also noticed that the dividend yield of the parent companies is dramatically lower than that of the MLP subsidiary. For example, EL Paso Pipleine (EPB) pays an 8.23% dividend; Kinder Morgen Energy Partners (KMP) Pays 6.68%. Both are MLPs owned by Kinder Morgen Inc (KMI) but KMI only pays 4.75%.
Is the lower yield from KMI because KMI has already paid the complicated taxes?
In an IRA, wouldn't I want the higher yield stocks? or am I missing something important?
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Old   #2 (permalink)
 
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Default is it bad to invest in an master limited partnership using an ira

Yes, there are potentially nasty tax complications. You can generate taxable events in a tax-free account because of a concept called UBTI (Unrelated Business Taxable Income).

There are a couple of MLP funds/ETFs that circumvent the issue - for a price.

AAII (American Association of Individual Investors) published a terrific analysis back in 2010. You need to be a member to see it online. Pretty good non-profit organization that publishes unbiased research.
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Old   #3 (permalink)
 
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Default is it bad to invest in an master limited partnership using an ira

A great deal of the benefit from investing in an MLP comes from the tax advantages to limited partners. So why waste the tax advantages of an IRA that you get anyway screwing around with an investment that is really intended to reduce taxes? Even in a non-IRA situation, MLP's can be not worth the hassle. If you like the high dividend, that's one reason. But you have to understand that the volatility of nat gas prices makes the share price pretty uncertain. You can lose that 6% dividend in a day or two if gas futures fall.

Personally I like blue chip US stocks with reasonable dividends in the 2% to 4% range.
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