I have gotten two different messages on the danger of investing in KMP/KMR in an IRA. One was FOOL and the say invest KMR in an IRA not KMP but TD Ameritrade said KMP in an IRA not KMR because of possible tax issues - same reason stated by FOOL?
Any one know which is which. I have an IRA and my granddaughters brokerage account. Which goes were?
Dmax, KMP could possibly cause tax considerations in an IRA, although they haven't reported taxable income on a K-1 in over ten years. In your situation (an account for a child), KMR is probably the better bet since they pay in additional shares. These share then earn more shares the next quarter and the power of compounding will leave a tidy sum for your 9 month old beneficiary by the time the child is 18. Wish someone had done something similar for me when I was an infant. By paying quarterly distributions in additional shares, KMR is essentially a DRIP and those can prove quite profitable over 18 years. Even if the stock doesn't appreciate, she will own nearly three times as much of it.
KMR pays exactly as much as KMP. For all intents and purposes they are the same stock. The only difference is that KMR just pays the distribution in additional shares including fractional shares. Also, for some reason KMP trades about 10 bucks higher, which even mystified Rich Kinder on a conference call a few years back. Why in the world would you pay 10 dollars more per share? The only think I can think of is that since Yahoo is too far out of it to fix any issues with their stock site, people think KMR doesn't pay a distribution.
Instead of paying cash KMR pays additional shares. These of course can be sold anytime one wants the cash. This is the best of all worlds because the added shares in turn collect more added shares. It is like re-investing dividends. I love the KMR shares in my IRA. They just keep compounding over the years.
Probably no one is currently having any problems holding KMP in their IRA. But there is always that lingering uncertainty regarding having to pay tax on "unrelated business taxable income" (UBTI) at some unknown future date.
To avoid this uncertainty put KMR in the IRA, and put KMP in a regular taxable account. Nice of you to be giving these securities to your grandaughter.
If paying for your grandaughter's higher education is on the horizion, then other factors should be considered before assets are transferred to her. Assets in the grandchild's name can disqualify her from receiving financial assistance in some cases. In such case, it would be better to just give her the money directly when she is in school and needs it.
From pg.18 of Wells Fargo MLP Primer:http://www.naptp.org/documentlinks/Investor_Relations/WF_MLP_Primer_IV.pdf
H. What Are I-Shares?
In order to expand the universe of potential investors in MLPs to institutional investors and tax-advantaged
accounts such as individual retirement accounts (IRAs), an investment vehicle similar to LP units was created
known as i-shares (the i stands for institutional). In May 2001, Kinder Morgan Management, LLC (KMR) was
the first i-share created and mirrors Kinder Morgan Energy Partners (KMP). Currently, the only other i-share
security is Enbridge Energy Management, LLC (EEQ), the i-share for Enbridge Energy Partners (EEP).
The i-shares are equivalent to MLP units in most respects, except that distributions are paid in stock instead of
cash. Distributions to i-shareholders are treated similarly to stock splits. The cost basis of the initial
investment does not change, but instead, is spread among more shares. One year after purchase, all gains from
disposition are treated as long-term capital gains. Unlike MLP securities, i-shares do not require the filing of
K-1 statements and do not generate UBTI. Thus, i-shares can be owned in an IRA account without penalty. The
i-share structure is analogous to an automatic dividend reinvestment plan, in our view. Thus, for investors who
prefer to reinvest dividends, the i-share security could be an appropriate investment.
Hope this helps.