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Author: A2Ninja Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Purchasing MLPs and REITs in a Roth IRA Date: 6/4/2010 11:34 AM
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I've been reading a lot recently about the advantages to holding REITs and MLPs in my Roth IRA or other similarly tax advantaged accounts. Basically, what I've come to understand is that REITs and MLPs tend to distribute the majority of their profits to their shareholders (or "partners") via a dividend. Since these dividends are typically higher than other stocks and would be taxed as ordinary income outside of the Roth IRA, it's more beneficial to hold them inside your Roth IRA.

However, I have also come across some reading that states that MLP dividends may be considered Unrelated Business taxable income (UBTI) and if it is over $1,000 it may be subject to tax even inside a Roth IRA.

I haven't purchased any REITs or MLPs yet, but some of the ones that I'm looking at are: EGP, KMP, EPD, & FRT. I'm open to any recommendations.

If the collective minds at The Motley Fool could weigh in on this tax saving investment strategy, I would greatly appreciate it.
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110541 of 121061
Subject: Re: Purchasing MLPs and REITs in a Roth IRA Date: 6/4/2010 12:02 PM
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I've been reading a lot recently about the advantages to holding REITs and MLPs in my Roth IRA or other similarly tax advantaged accounts. Basically, what I've come to understand is that REITs and MLPs tend to distribute the majority of their profits to their shareholders (or "partners") via a dividend. Since these dividends are typically higher than other stocks and would be taxed as ordinary income outside of the Roth IRA, it's more beneficial to hold them inside your Roth IRA.

While REITs pay dividends, some of the distribution is typically return of capital, so the true yield may be lower than reported on financial reporting sites. MLPs do not pay dividneds; they make cash distributions. The cash distributions are return of capital and are not taxable. However, MLPs also "distribute" their income and expenses via Schedule K-1. This income/expense is reported on your tax return (if not held in a tax-sheltered account) and may be more or less than the actual cash distributed.

However, I have also come across some reading that states that MLP dividends may be considered Unrelated Business taxable income (UBTI) and if it is over $1,000 it may be subject to tax even inside a Roth IRA.

Correct, except replace "may be" with "is".

I can't comment on the suitability of any of the REITs/MLPs you may be considering.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110542 of 121061
Subject: Re: Purchasing MLPs and REITs in a Roth IRA Date: 6/4/2010 12:50 PM
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I own units in EPD and KMP, in a plain vanilla, taxable account.

On my 2009 K-1 for EPD had an unrelated business taxable income (UBTI) of about -5% of the value of my holdings. KMP had UBTI of about -6% of the value of my holdings.

I used to hold my partnerships in my IRA, to avoid the hassle with the K-1's at tax time until the folks around here convinced me there could be a problem. Looking back at my returns over the past 10 years, the UBTIs are negative more often than not, and in past years I've sometimes owned as many as 20 LPs, mostly oil related, but some real estate and restaurants.

We get to the sound advice of "don't let the tax tail wag the investment dog".

Possibly Ira could tell us what type of MLP produces positive UBTIs. Not the oil pipelines. Clearly it could be any type--that's why the negative number is "unrelated". It isn't because the partnership is losing money, either, because both EPD and KMP have been successful partnerships with very nice cash flow and appreciating market price.

If you have a lot of money (six figures?) in one LP, you MIGHT get over $1000 in taxable income in your IRA, but if you have a more modest holding, and especially if it is spread over a few different partnerships in different businesses, not likely, IMHO. Or you can put them in your taxable account and be sure.

Best wishes, Chris

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Author: Hohum777 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110543 of 121061
Subject: Re: Purchasing MLPs and REITs in a Roth IRA Date: 6/4/2010 1:44 PM
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Possibly Ira could tell us what type of MLP produces positive UBTIs. Not the oil pipelines. Clearly it could be any type--that's why the negative number is "unrelated". It isn't because the partnership is losing money, either, because both EPD and KMP have been successful partnerships with very nice cash flow and appreciating market price.

Not Ira. I owned a tiny MLP, Rio Vista Energy Partners (RVEP) in an IRA. It generated
positive UBTI one year. If I recall correctly, it was $60-$80 of UBTI on a < $1000
investment. When I owned RVEP, it owned 2 refineries and a pipeline between the two.
They started diversifying into other energy assets - truck and rail transportation, exploration
and production of energy, etc. I'm not sure there's any easy way of telling beforehand what
the UBTI number will like for an individual MLP.

Most other MLP holdings have ended up in a taxable account.

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Author: mapicsman One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110564 of 121061
Subject: Re: Purchasing MLPs and REITs in a Roth IRA Date: 6/13/2010 5:05 PM
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As the other posters explained UBTI over a $1000 a year will cause problems in an IRA or ROTH IRA. Since you are looking at KMP as one of your MLP's, you might consider KMR instead which pays its dividends in stock rather than cash and therefore does not generate UBTI.

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