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Is BIP a true master limited partnership? The reason I ask is the difference in tax treatment. With an MLP held in a tax-deferred account like an IRA, taxes may have to be paid on some of that income. Morningstar explains:

"With most investments held inside an IRA or 401(k), account owners don't have to pay taxes on any income or capital gains paid out from year to year. Instead, they won't owe any tax on their accounts until they begin taking distributions during retirement. By contrast, the IRS considers cash distributions from MLPs held inside a tax-deferred account as unrelated business taxable income, and any UBTI distribution that exceeds $1,500 (across all the IRA accounts that you hold) is taxable at the account level.

So to sum up: Holding an MLP in a tax-deferred account is a bad idea on a couple of levels. First, you'll pay income tax on distributions that exceed $1,500, and you'll also pay tax when you begin taking withdrawals from your account during retirement. Second, you won't be availing yourself of MLPs' benefits when held within a taxable account."

Thanks in advance.

Ken
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Hey Ken,

From what I understand, BIP is subject to the tax implications mentioned in that Morningstar excerpt that you posted. You can find more information on Brookfield's website at http://www.brookfieldinfrastructure.com/content/investor_rel...

From my limited experience with MLPs (through a former investment in EPD), there are a couple of things to keep in mind.

First, holding an MLP in an IRA is only a bad idea if you have UBTI of over $1,500 a year. That typically means that any account with MLP investments of $20,000 or less are safe from this.

Second, the "MLPs' benefits when held within a taxable account" come with strings attached. Namely, you may have to file state tax returns in many more states than you would otherwise. One year of having to file 7 state returns due to a $5,000 investment in EPD was enough to get me to sell. I use TurboTax and can assure you that was a gigantic pain. If I had an investment of $50,000, I estimated that I would've needed to file state returns in 22 states.

Hope that helps. Does anyone else have firsthand insight with BIP?

Brian
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Thanks, Brian
Much appreciated.
I have eliminated my retirement account positions and reduced my post-retirement account exposure to keep distributions just below $1,500. Importantly, these distributions are not dividends, they are earnings on which taxes are paid. However, there is a tax advantage in that earnings are reduced by expense (e.g., amortization, depreciation) so they are somewhat tax advantaged. Keeping BIP in a retirement account complicates things and nullifies the tax advantage, so it is not a good idea to buy shares in a tax-advantaged account.
I was a bit thrown off my Seth and Michael's saying that BIP is "similar to a master limited partnership. As far as I can tell, it seems to be one.
Ken
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What if you buy within a Roth IRA instead of a traditional IRA?
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I'm not a tax accountant, but as I understand it the distributions are, after amortization etc, (which makes a lot, even a the majority in many cases, of the distribution tax-free) considered the same as earnings - like your salary. BIP will send you a K-1 at the end of the year rather than a 1099. The IRS term is "unrelated business taxible income" or UBTI. Morningstar wrote an article that said "...any UBTI distribution that exceeds $1,500 (across all the IRA accounts you hold) is taxable at the account level." and "...you'll pay income tax on distributions that exceed $1,500." Here's another introductory rundown:

http://dividendsvalue.com/6067/increasing-dividend-yield-par...

In addition, the share basis is adjusted down annually by the amount of the distribution.

So I'm trying to keep my distributions below $1,500 and sort of see what the tax season brings before I decide if its worth it. I'd welcome any clarification or correction by those more familiar with the issues.

Ken
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Thanks Ken, that helps a lot..
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