KMR does not have the UBTI issue at all, because KMR does not pay anything that is recognized as a cash distribution. By using an in-kind payment system, KMR not only avoids UBTI in retirement accounts, but also provides 100% tax shelter (deferrment). Of course it does amount to mandatory reinvesment.
KMI certainly does not have any UBTI issues. It is a conventional stock-ownership company paying conventional dividends.
IMHO if you were going to reinvest anyway KMR is a hands down winner over KMP. The higher yield alone is going to win, plus it has a 100% tax shelter with no reporting hassles (neither relevant inside an IRA/401/403 of course). It will always pay the same basic dollar valued distribution. Unless you believe that KMR's price will steadily fall farther and farther behind KMPs, it is hard to see how KMR cannot do better in the long run.
I don't know if you saw my post on the KMR discount (which is the same as saying KMR has a higher yield) in KMP message # 8498.
One minor issue to consider with KMR: different brokers handle partial shares differently. There has been a lot of discussion of this on the KMR board. Many brokers (including the 2 where I own KMR are both like this) refuse to handle partial shares of KMR (even though they cheerfully handle partial shares of conventional dividend companies), so they sell any partial shares you may get in a quarter. This can make small amount investments in KMR less attractive, and you may want to pick an investment so you minimize the amount of partial shares you will get (at least initially). As right now the distribution is one KMR share for every 57.9 you own, I would suggest buying in multiples of something like 60 to 62 shares.
you seem very knowledgeable in this, Does KMR have the same issue ? It looks like KMI does not but pays far less interest. Also what is the best investment for value ie both growth and dividend KMR or KMP ?
UBTI = Unrelated Business Taxable Income
There is, of course, the very closely related acronym UBT = Unrelated Business Tax (which is the tax on that type of income). UBI also pops up in discussions, as you face tax on your UBI.
Partnerships held inside a retirement-type account face UBT on UBI. This is true for any type of partnership, from publicly traded limited partnerships such as Master Limited Partnerships to private partnerships.
All Unrelated Business Income faces the UBT. However, IRS rules give forgiveness for the first $1,000 of UBI you earn. If your UBI is forgiven, you do not have to file anything about it. If, however, you earn $1001 or more of UBI, you then face tax on the entire $1001 (or more) amount, not just the amount over the $1k forgiveness level. To add insult to this injury, you must pay this tax from funds outside of the sheltered account. This may not be a big deal if you are already taking funds out of the account (either through mandatory minimum withdrawals from a conventional IRA if you are over age 70, or simply because you are electing to take and spend some of your retirement account). In that case you simply pay the UBT on some of the money you take out. You probably owe other income tax on the withdrawn funds anyway (depending on the specifics of the type of account it is), and you just pay some more. However if you are not currently making any withdrawls then you have to pay the tax from other disposable income.
All this is why I refer to the $1k limit as a tripwire. For my purposes it is well worth staying under that limit. Others, of course, have different opinions. There is one article posted at the PTPCoalition website that basically argues: don't sweat it. Just pay the tax and get on with it. Like I said, different opinions for different people.
The UBTI limit applies to each retirement-type account separately. Within each account you have to sum the total UBTI received from all investments.
At the current KMP distribution (0.69/quarter), each unit would receive $2.76/year. Hence 1300 units would receive $3,588/year (likely to increase as distributions increase, and more so if you are reinvesting distributions).
The KMP current "book" tax shelter percent is 90%, which would mean that 10% is UBTI. Hence of your $3,588/year, only $358 of that is UBTI.
There are a few catches to this, but you are clearly well under the UBTI tripwire in total across 3 accounts.
The few catches are 1) the tax shelter is not guaranteed, nor is it fixed. In tax year 2003 most of the MLPs managed to show a paper loss, so there was very, very little paper profit to show. I forget the exact shelter for KMP, but all of my MLPs had a shelter rate of >96% (some up to 99%), hence the actual UBTI was very, very low.
The second catch is any one individual's shelter rate goes down over multiple years of holding the investment. As you get more and more of your initial capital investment returned, your sheltered part goes down. In theory it could reach 0% eventually, but in practice that doesn't happen. As the MLP raises new capital from Secondary Offerings to invest your capital base goes up some.
One of the important outcomes of all this is that the tax shelter amount varies for each investor (actually by each class of investor based on wthe quarter they purchased, but if you reinvest it really goes back to virtually different for each investor). That is one reason that the K-1s don't come out until March 1 or so, as KMP has to create each one differently.
Bottom line: you appear to be well under the UBTI tripwire, and should be that way for at least several more years. It certainly pays to monitor it though, as it is possible to be OK now and over the $1k amount later.
<<<For an MLP the UBTI portion of the distribution is essentially the unsheltered part of the distribution. For new owners of MLPs that typically means that your UBTI portion is between 1% and 20% of the distribution. Depending on the yield, you can typically own something like $60k - $80k in MLPs and be under the UBTI tripwire.>>>
I own 1300 shares of KMP that I bought this year divided between 3 pension plans. I want to stay below the 1000 dollar limit. What I don't understand is how to calculate the unsheltered portion. Am I over the limit with 1300 shares? Does it matter if they are in different pension plans that I own(IRA/401K)? Could I buy more?
Thanks for all your help.
Like you, I also believe getting close to data, including charting things. I did that while in the midst of some of the simple statistical analysis I was doing last week.
Unfortunately, I can't see the spreadsheet you posted (I'm not a member of the Zafshrink group). I would like to see it. Chartny: Could you email it to me? I use a Yahoo email address : abter1 at yahoo dot com (my address is absolutely no secret, but it still is worth trying to keep it from being harvested and spammed to death).
Tell you what: if you show me yours I'll show you mine! If you want I'll even go first! Send me your email address and I'll ship a zipped spreadsheet to you (zip because I used daily data...the file is midsized).
My situation is having cash sit on sideline, wanting to find a stock that is less volatile having growth potential to occupy these cash.
Following abter and chart's informative insight, I am going to set my entry point at 41.00+ ~ low 42.00