ok, silly IRA question i'm sure for most on this board.
i am 33, i have 100 shares in a traditional IRA. i like this company and the business model so i don't have any reason to sell (unless there is earth shattering tax news).
can someone provide some additional info on UBTI? i have a general working knowledge of what it is. am i going to have to file any additional paperwork as part of my taxes or with my broker (k-1 form?). thanks to anyone who can shed some light. i am used to just reporting how much i deposit in my account each year for my ira, hopefully there is no extra paperwork.
I disagree with peason3236's comment. Under the right circumstances IRAs are very good places to own many (but not all) MLPs. In fact the paperwork simplification of holding MLPs in an IRA is a distinct advantage. Never forget though that you are of course foregoing the tax postponement features of MLP investing by owing in a tax-advantaged IRA account.
The UBTI issue is a real one for IRA investing, but for many "UBTI-friendly" MLPs it turns out to be a small and easily managed issue.
A lot has been written on this and other MLP boards about UBTI. Some posts include excellent factual info, some flat wrong info, and a lot of opinions (e.g. "I would never own an MLP in an IRA") that the reader has to consider for them self.
UBTI FACTS: 1) if your total UBTI in all IRAs registered in your name (SS#) exceed $1k in a year, your broker(s) will likely have to file a 999-T form. You never file..only your broker. This is why your broker wants you to send a copy of each K-1 you have. Just because your broker must file does NOT automatically mean you will pay tax, much like just because you have to file a 1040 does not mean you owe tax. If your broker files they are likely to charge you for that service ($20/year is common).
2) Some MLPs generate a LOT of UBTI per unit owned each year. Some (most) generate very little for a long time. Some are highly variable (a lot one year, big negative the next), which makes managing UBTI tough.
3) KMP has not generated a penny in UBTI for any investor since at least 2000. I believe it is actually since they began operations as an MLP (early 90's), but I cannot document that. Hence KMP is extremely "UBTI-Friendly"
4) KMP has a non-identical twin sister, trading as KMR. All though the market prices KMR about 10% less than KMP, each represent exactly the same stake of the KM* partnership enterprise. KMR is not an MLP (it is an LLC), and thus can never produce UBTI. KMR pays quarterly dividends directly in more shares (as a payment in kind system), so you can consider it mandatory reinvestment if you want. KMR was designed for owning in an IRA (as well as by mutual funds, pension funds, etc.). However with KMP's perfect record of never generating any UBTI the initial design advantage of KMR (never any UBTI) is moot. KMR is also an excellent tax advantaged investment in a regular account; no cash changes hands each quarter...only shares...hence no taxable account. The IRS views it essentially like a mini-split at about a 1.015-to-1 ratio each quarter.
5) When you sell an MLP in an IRA, you do not trigger any special "recapture" of past UBTI (unlike an MLP sale which triggers recapturing all tax-deferred income in a regular account, which you then own income rate tax on). So if your UBTI per year from an MLP starts out negative or very small, and slowly rises over time (as it generally will in many MLPs) you can sell in a few years when the annual UBTI generation starts to push you up toward the $1k tripwire.
6) One advantage of sending your broker your K-1s each year, even when you are under the cumulative $1k level, is they can carry forward negative UBTI's from previous years to offset positive UBTI in a future year. They can't carry if forward if they don't know about it from you sending them the K-1. This carry forward only can be done for the same MLP. Example: suppose you bought your only MLP in your IRA, and your investment started out generating -$2,000 in UBTI in the first year. Over the coming years that negative number will likely start to increase. So in perhaps 6 years your annual UBTI might hit $0, but you will have maybe -$10,000 in available carryforward UBTI credits. In the 7th year the UBTI might be +$300; that is still under the $1k tripwire so no tax due. That +$300 doesn't even count against your stored carry forward credits. In a few more years your UBTI might finally get to over $1k. Your broker than then use your carry forward UBTI credits to offset that $1k...still no tax paid. This can go on for a few more years until you have used up all your negative UBTI carry forward credits. You have had several years of warning that it is coming up time to sell, which you finally do. You have had something like 10 or 20 years of investment in that only MLP in your IRA and never paid any UBTI tax. If you want you can repurchase the same MLP in the next tax year and start over again.
7) There is a long running project over at the InvestorVillage board (in their MLPs section...remember that s) about real world UBTI experience. As I said earlier, many MLPs are pretty darn UBTI-efficient for a long time (but only KMP is "perfect"). Others are horrible from a UBTI point of view...you can be allocated more in UBTI than you get in distributions in a year. The E&P MLPs (exploration and production) are the most likely to be like this. Search for my name (Abter1) and UBTI either here on Yahoo or over at the IV board and you will find lots of information about the project.