The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: MLPs in an IRA||Date: 7/5/2013 7:44 AM|
|Author: TMFHockeypop||Number: 118785 of 119697|
Sorry if you've discussed this, but in looking at Linn Energy (LINE) on the VALUE HOUNDS board which is kinda a MLP (second + sign): http://ir.linnenergy.com/faq.cfm
I also found this article from "Seeking Alpha" that suggests that perhaps a little is OK:
I'm used to Phil's cyber eyeroll but thought I'd open myself up to more widespread ridicule for looking at this. Also, there is disagreement in the comments about whether this can be done in each IRA or perhaps also in differing spousal IRAs. If you've discussed it please point me to the post. THANKS!
A deeper look should be taken because there is rarely tax due. The tax is based on the UBTI shown on line 20V of the K-1 the MLP sends out each year. For many MLPs this amount is negative. Where a positive amount is shown it is combined with the negative amounts for other MLPs owned in the same IRA. The first $1,000 of the combined UBTI is tax exempt. If combined UBTI is greater than $1,000 then the IRA must pay a tax. The tax amount is:
$50,000 or less
15% of UBTI*
$50,000 - $75,000
$75,000 + 25% of the UBTI* over $50,000
$75,000 - $100,000
$13,750 + 34% of the UBTI* over $75,000
$100,000 - $335,000
$22,250 + 39% of the UBTI* over $100,000
*UBTI greater than $1,000
The UBTI tax is based on the IRA UBTI income only. It is not based on your tax rate. You may have taxable income of $1,000,000, but if the combined UBTI from the MLPs in your IRA is $10,000, then the IRA's tax will be $1,500 (15% of $10,000).
The tax is paid by the IRA, not you.
Since the MLPs with negative UBTI offset the MLPs with positive UBTI is very hard to get even +$1,000 of UBTI. Getting combined UBTI of more than $50,000 (where the tax rate increases past 15%) is almost impossible.
Many MLPs pay distributions of more than 8%, including four of mine (Breitburn Energy (BBEP), Mid-Con Energy (MCEP), QE Energy (QRE), and Vanguard Natural Resources (VNR)). Even if UBTI tax is due the income earned will still be considerable. For example, an 8% distribution will still yield the IRA 6.8% after UBTI tax; a 10% distribution will yield 8.5% after UBTI tax. In fact, the yields will be much closer to 8% or 10% because of the limits and combinations described above.
Finally, there is some thought that considerable UBTI and tax may be generated when all the units of a particular MLP are sold out of an IRA. I say may because of I have sold out of MLPs in an IRA before and I have never noticed the increase in UBTI or tax. I sold out of both Kinder Morgan Partners (KMP) and Energy Transfer Partners (ETP) in one year and there was no UBTI tax paid. I haven't studied the issue hard enough to know whether a mistake was made, the amounts were small enough to keep away from UBTI tax, or both. The only thing I'm sure of is that UBTI tax has not been a problem for me so far.
I also called my broker and they told me they only consider the amount on line 20V when they put together the 990-T. Thus, any adjustments made for the final year that an MLP is owned must be made by the MLP itself, and the adjustments must be reflected in line 20V for my IRA tax to be affected. It is possible that KMP and ETP made these adjustments last year and they were simply not enough to override the negative amounts from other MLPs. Therefore, it may be possible to significantly reduce the hit from exiting an MLP in an IRA just by having other MLPs in the same IRA that will produce significant negative UBTI.
It may well be that if I hold enough units long enough I will see a large UBTI one year that will generate a nasty tax. I will be watching my K-1's accordingly. I even plan to sell out of my remaining units in Linn Energy (LINE) in one small IRA I manage just to see what happens. If I do this, I will probably buy the same amount of units in another account because tax decisions should not override investment decisions.
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