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Linn Energy, LLC (LINE) Message Board

  • peggyherrell peggyherrell Apr 8, 2012 10:27 AM Flag

    Tax consequences of owning MLP's in an IRA account

    I am amazed by the dead ends one encounters when trying to arrive at the truth to this matter. Finally, after talking with several MLP tax assistance numbers, the IRS, and a tax expert, I have come to terms with my tax obligation.

    First, I am speaking ONLY to my situation. I own 4 MLP's in my IRA account. As long as they are held in my IRA, taxes will be paid on all gains in value and distributions when I make cash withdrawals from my IRA. If you hold MLP's in a regular brokerage account, my comments are not meant for you. That said, the IRS tells me if the tax ID in part II box E is not yours (social security number) it should be an identifier for your broker. They will track your UBTI tax obligations (the number found in part III box 20 noted "V") and when you close out your positions in each MLP, they will be required to pay such tax for you out of your IRA account or contact you as to your UBTI obligation. Since most passive income is negative, it would be unusual to have any tax obligations since it would have to be above $1,000 annually. (Note: you can refer to your annual K-1 to keep track of your future UBTI tax that might come due when you close out your partnership share ownership. If the sum of your dollar amounts Part III box 20 noted "V" are under $1,000 in a given year you will not have any future UBTI obligation for that year). The representative I spoke to at TD Ameritrade stated he had never had to file a tax payment on UBTI to the IRS. Of course everyone you talk to will tell you to speak to a tax professional. He did as well.

    I spoke to a CPA and was told no taxes should be filed from information on your annual K-1's received from MLP's held in an IRA account. Therefore regarding you K-1's that you get each year, keep them on file. The numbers are for your information only. (Note dividends (Part III box 6) and interest (Part III box 5) are not being paid to you thus you have no tax obligation even though you might be told by the MLP to file this on your annual 1040 schedule E.)

    Rest easy. MLP's are good investment in an IRA. I encourage you to run my comments by a tax professional for your final peace of mind.

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    • This is from one of the ones you posted from yahoo:

      "The investment seeks high current income, and capital appreciation is a secondary consideration. The fund invests mainly in bonds that are obligations of U.S. companies, are below investment-grade in quality (sometimes referred to as "junk bonds"), and have intermediate- to long-term maturities (three years or longer). The adviser may consider, among other factors, credit, interest rate and prepayment risks, as well as general market conditions, when deciding whether to buy or sell investments. It may also use derivatives, such as futures, options, warrants, certain foreign currency transactions and swap contracts, for both hedging and non-hedging purposes."


      If you notice, the one you posted not only invests in "junk bonds" but it also uses leverage by using futures & other derivatives which are leveraged.



      I think that mreits like AGNC, MTGE, NLY and a few others are probably much safer, and with double the yield of that one.


      That is because the default risk is reduced by the gov. guarantee & even for the hybrid mreits, still a large portion of their holdings are U.S gov. guaranteed.

    • Ronharv,

      I don't consider the mortgage reits investments that can be put on auto pilot (vs say an DRiP in Kraft or Coca-Cola).

      The dividends are exceptional however I know several individuals that make better returns simply trading them on book value, regardless of the dividend. They buy when it drops say 5%-10% below BV and sell when it rises above BV (knowing a secondary is likely when it goes above BV). They jump in and out all the time and do quite well.

    • OK, genius, tell me how an investment in an IRA will grow faster than one that I described.

    • "The compounded increase in equity over 40 years is "magic."

      I think so too, however when I proposed that before and noted that it was the basis of my investment strategy, you used a lot of gobbledegook to dispute the whole idea.

    • Other ideas besides LINE (of which I now own somewhat more than 10K with an avg. buy-in of 27.25)? For my personal comfort level I like some of the better quality high-yield bond funds for their monthly income and diversification amongst numerous companies: VWEHX, PRHYX,MWHYX,ABHIX,and PHYIX. And for an investment-grade individual bond: AXA 8.6% of 12/15/30. It's dollar-denominated and currently underpriced. I have other investment-grade bonds, but they're currently priced too high for me to recommend to any income-seekers. (Naturally, every individual's needs, financial and psychological, can differ considerably.)

    • Back to your original question.

      The screen on finviz revealed LINE as the one that you would probably feel most comfortable with based on a strong buy rating & also a channel-up chart pattern:

      http://finviz.com/screener.ashx?v=211&f=an_recom_strongbuy,ind_independentoilgas,sec_basicmaterials,ta_pattern_channelup&ft=3



      If you screen for the same thing but with only a buy or better rating then you get this:
      http://finviz.com/screener.ashx?v=211&f=an_recom_buybetter,ind_independentoilgas,sec_basicmaterials,ta_pattern_channelup

      but most you probably would not feel comfortable with.


      But, I remember that Roger likes these:
      http://finviz.com/screener.ashx?v=211&t=COG,EVEP

      both good companies, but I do not like their chart patterns recently.


      Maybe the best one for you is LINE?

      If you have any other ideas, please share.

    • CORRECTION: They didn't get NLY. It was Thornburg Mortgage, which looked great until it getting shot down by its leverage. Ageing brain, I fear.

    • Well, after that, better get the turbin once more for this:


      http://finviz.com/screener.ashx?v=211&f=an_recom_strongbuy,ind_independentoilgas,sec_basicmaterials,ta_pattern_channelup&ft=3


      There seem to be ONLY two indp oil cos with both a channel-up chart pattern & strong buy rating on finviz.



      (oh, swami, please see what there is to see)...Guess which one of our favorites is one of them?

    • I have two relatives who bought NLY some years back in the high 20's. Bad timing, I suppose.

      You admit to MTGE being leveraged (it's around 8X, I believe), yet accuse me of a "quick assumption-based, reflex-response" when I said I don't feel comfortable with the risk of a leveraged-based company. I apologize for my comfort level being unsuitable to you and promise to exercise my quick assumptions and reflexes in hopes that they will strengthen enough to emulate your investment perspectives. Results not guaranteed, however.

    • We all get you have no shame. It is more of the math you do not understand and refuse to learn.
      “If you have it in a "taxable" account and reinvest the distributions, the amounts in both accounts will be the same, and you would never have to pay taxes on the distributions in the taxable account. “
      Now if you are clever like Jack MLPs are hopefully held until children inherited them and get a full step up in basis. That is not going to happen with an IRA of either sort.
      If you investment has double in capital appreciation over a few years paying 15% gains vs ordinary income is massive.
      .The risk and returns are simply not symmetrical as you assume. You know what happens when you assume rather than learn.
      Perfect fit for the OLB. It is interesting they are for the first time accepting anti-alternative energy corruption from you. Very peculiar.
      Maybe some more foolishness about ethanol will make you feel better? ;-)
      But the most basic error you continue to make is past performance predicting the future. That returns will be the same for infrastructure play going forward base on absolutely nothing about the future and current conditions.

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