Anyone familiar with the 'Master Limited Partnership'? Have a client asking about, so I'm researching? This is in a Roth account. If 'gains' from one of the Roth components is used to 'purchase' or invest in another Roth component, is there a tax consequence? The money stays in the Roth and never taken by investor.
Basically when you have a MLP inside an IRA, you have to look at the K-1 you get each year and see what the unrelated business taxable income is (find it in box 20U). If this is above $1000 during a tax year for all MLPs in your IRAs, then there is a requirement to file a form 990 - though I understand that this would be done by your IRA broker if this happened. Since you get to net out all the K-1s from MLPs in this calculation and many MLPs tend to toss off negative UBTI in a given year, this limit generally won't be hit by most investors unless they own very large amounts of MLP units (probably in the thousands or more). If the UBTI limit is over $1000, then you can file those K-1 forms away since you won't have any other tax related issues with them.
Can you cite an authoratative source for the "netting" of K1s for UBTI purposes? There is quite a bit of disagreement on that. Also some folks feel you can carryover negative UBTI to offset positive UBTI in a future year (for the same MLP) provided a 990T is filed. Obviously you cannot net and carryover as well. I have yet to find anything from the IRS on this topic.
Also some of the E&P MLPs (VNR, EVEP) throw off significant amounts of UBTI ($2/unit even after depletion, etc). Doesn't take much to get to $1K in that situation
As a rule it is best not to have an MLP or other pass-through entity in an IRA. If instead it is owned directly, any depreciation or depletion may be used to reduce your other taxable income and any increase in value is treated as capital gain. With a tax deferred account like an IRA withdrawals are treated as ordinary income.
Correct me if i'm wrong but the only tax treatment for Roths if at least 59 1/2 is a loss if the total roth distribution is less than original contribution/basis but if it's higher it's free if all other rules are abided by. what happens inside the Roth has no effect.
What are MLPs? MLPs are partnerships that trade on U.S. public exchanges or markets (e.g., NYSE). Most MLPs own and operate assets in the energy sector as natural resource-based companies that own, build and maintain the energy infrastructure (e.g., pipelines, storage facilities, gathering systems and processing plants) of North America. They are structured as partnerships rather than taxable corporations, so they do not pay federal or state income taxes at the entity level. The business model of a typical MLP seeks the advantages of high barriers to entry, low price sensitivities and continued demand for energy-related products and services due to overall energy demand.
Why invest in MLPs? MLPs have historically performed well in a variety of market environments, typically with low correlation to the market. Investors have favored this asset class for its recent history of high, stable and growing distributions. However, there can be no assurance that performance, low correlation or high distributions will continue in the future.