No. of Recommendations: 5
I understand that there are unfavorable tax consequences if you hold a MLP in your retirement account....

Hi again, Htownrich!

I hold MLP's in both taxable and tax-deferred accounts....and there are pros and cons on both sides:

The issue most worry about when holding MP's in an IRA is something called UBTI (unrelated business taxable income)....which can cause one to have to pay taxes within an IRA if the total UBTI from all sources is more than $1000 in a year. I have never had this issue; indeed, one of the things I research is whether or not a given MLP tends to generate UBTI; some even generate negative UBTI.

One plus to holding an MLP in an IRA is that one doesn't have to worry about/pay for all the complicated tax accounting on the annual K-1 they issue. On the flip side, depending upon the size of your MLP holdings and where they generate income, you may have to file taxes in states other than where you live (also has never been a factor for me).

Keep in mind that as "pass through" tax entities, the distribution from MLP's is usually some combination of return of capital (which is not taxable) and earnings (which is) holding them in an IRA negates some of the tax benefits of this type of distribution.

From another post I made some time ago:

...As to MLP's and taxation....well, it is a somewhat complicated issue, but as to your specific questions:

1. If you hold an MLP in an IRA or other tax-deferred account, you will NOT have to file a regular tax return at all...state or federal....because that is the nature of those accounts.
If held in a taxable account, you MAY have to file in some states, but that is a function of the amount of taxable income you receive from an MLP versus a given state's minimum income tax reporting amounts....and keep in mind that sometimes part of an MLP's distribution is not taxable.

2.One taxation issue that MAY cause a taxable event in an IRA/tax-deferred account is something called UBTI (unrelated business taxable income), but that is only a factor if you receive UBTI totaling $1000 or more in a given year. Many MLP's have zero or even negative UBTI.....and although I hold numerous MLP's in both taxable and tax-deferred accounts, I have never crossed that threshold (i.e. it take a very large holding in MLP's that produce UBTI to trigger the UBTI tax in an IRA.

Some things you may want to read regarding MLP's:

Keep in mind that as a Home Fool, I don't speak for TMF or anyone but myself....and that I am NOT a tax or financial professional.

II and PP Home Fool
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