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Energy Transfer Partners, L.P. Message Board

  • peggyherrell peggyherrell Jul 22, 2011 11:09 AM Flag

    UBTI Concerns - site found that explains.

    It seems there is much confusion on this subject and much advice given on the subject. I have found one that seems to explain this concern to my satisfaction. The link is:

    If this is a factual rendering of the facts, I believe I am in the clear on my investment approach. This excerpt from its "dos and don'ts" when investing with a self-directed IRA is as follows:

    Watch Out for These No-Nos

    There are "prohibited transaction rules" intended to prevent you from using IRA money to engage in certain "self-dealing" transactions, which are deemed to be inconsistent with an IRA’s status as a tax-favored retirement account.

    Also, certain types of investments could cause your IRA to be taxed on so-called unrelated business taxable income (UBTI). That would have a negative effect because the advantage of tax deferral — or outright tax avoidance in the case of a Roth IRA — is the biggest selling point of individual retirement accounts. (See right-hand box for more information on UBTI.)

    Because of the risks of running afoul of the prohibited transaction and UBTI rules and due to vague official guidance on permissible assets, many IRA trustees won’t allow these accounts to hold anything other than traditional retirement investments. That said, some companies specialize in functioning as IRA trustees for people who insist on alternative investments. If you are one of those people, please keep reading because suitable alternative investments, such as the following, can be held in what is often referred to as a "self-directed IRA:"

    Stock from an initial public offering.

    Closely held stock.

    Some real estate.

    Options to buy real estate.

    Oil and gas royalty interests.

    Stock options.

    Mortgages or loans to be held for investment.

    This is not an exhaustive list. As you can see, some of these alternative investments are not liquid. This can present problems. If you have too much of your account tied up in illiquid investments, you won’t be able to dip into your IRA for cash when you need it. In particular, it is important to maintain enough liquidity to take your annual required minimum distributions after reaching age 70 1/2. Why? Because if you fail to take these minimum distributions, the IRS can penalize you for 50 percent of the difference between what you should have withdrawn from your account each year and what you actually withdrew (if anything). Thankfully, Roth IRAs are not subject to the required minimum distribution rules until after the account owner dies.

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    • Thank you for sharing your research and thoughts on this issue. now i wish i could just get my head around it. this is far from my area of expertise. i have been in kmp since the mid early 90's.

    • peggy can not find were you described to the board when and how you got the IRS advice that as long as making withdrawls from IRA there was no tax on ubti. Can you please clarify for the board when and how that information came from the IRS. It would be very much appreciated

      Thank You

    • That is an interesting site which I had not seen. Thanks for posting it. There is a side box on the page about UBTI. Text of that is:
      "Avoid Unrelated Business Taxable Income

      Certain types of IRA investments can potentially trigger unrelated business taxable income (UBTI). When this happens, your IRA may owe federal income tax, which really defeats the whole purpose of the account. The UBTI rules are intended to prevent IRAs from investing in income-producing businesses via direct ownership or via ownership of a partnership or LLC interest. An example might include using an IRA to buy an interest in a cattle breeding partnership.
      As mentioned in this article, leveraged assets can also generate UBTI for an IRA. So investing in a partnership that owns leveraged assets could cause UBTI problems.
      The good news: Rental income from real property is generally excluded from the definition of UBTI (assuming the property is not mortgaged). Therefore, using your IRA to buy unmortgaged rental real estate and collect the resulting net rental income should not trigger the UBTI rules.
      Similarly, using your IRA to buy oil and gas royalty ownership interests won't trigger UBTI (assuming the interests are not leveraged)."

      The advice there is certainly "the common wisdom" you will get on the idea of holding MLPs in an IRA.

      However, I do not agree it is good advice for all people, and I own MLPs in my IRAs. Here are my main reasons. (continued in next post)

      • 1 Reply to abter1
      • {continued from previous post}

        1) My reasons all start with the historical facts: MLPs have been excellent investments. I like to use Alerian MLP index with reinvestment (^AMZX) to track MLP returns. The AMZX is a typical "pure" market cap weighted index of the 50 largest energy-related MLPs.
        Here are the AMZX total returns, along with the S&P 500 index change for the past 5.5 years.
        2011 (YTD) AMZX = +5.5%, S&P500 = +6.82%
        2010 AMZX +35.85%, S&P +12.64
        2009 AMZX +76.41, S&P +23.49%
        2008 AMZX -36.91%, S&P -38.47%
        2007 AMZX +12.72%, S&P +3.55%
        2006 AMZX +26.07%, S&P +13.6%

        My conclusion; Totally ignoring the tax shielding advantages of MLPs, the total return of the MLP sector has been excellent, up years and down, compared to the S&P 500. I very much want to have some of the MLP sector as part of my portfolio.

        2) If someone has investments in both IRAs and regular taxable accounts, it makes perfect sense to hold the MLPs in the regular account to take advantage of the tax shield. However like many working people these days, throughout most of my career I have been in a non-pension world. Essentially all of my retirement funds are in 401k's and IRAs. If fact, after paying for my 2 kids college educations, all of my investment funds are in 401ks and IRAs. Therefore, my choice comes down to A) invest in MLPs and give up the tax shield provisions, or B) do not invest in MLPs. Given the returns I presented above, the stability afforded by the strong quarterly cash flow, and my believe that the energy transportation sector is a very solid investment for the foreseeable future, I choose to own MLPs in my IRA.

        3) The UBTI issue is very, very easily managed through selection of UBTI-friendly MLPs. I am running the annual UBTI data project on Investor Village, which collects data on real-world investment experience with UBTI. We have over 1000 data points now from over 100 people on over 75 MLPs. While there are MLPs that do generate a lot of UBTI, there are very many that produce very little UBTI for years. It is quite easy to select a diverse portfolio of MLPs that produce little or no UBTI sufficient to invest several hundred thousand dollars in MLPs and stay below the tripwire. If one year an MLP I own jumps up and produces a lot of UBTI, I can use the negative UBTI's from previous years to offset the high UBTI that year, and still avoid paying UBTI tax from within my IRA.

        3) not a major issue, but while dealing with K-1s isn't really all that hard, NOT dealing with them is even easier. Other than sending my brokerage a copy of them each year, there is absolutely zero tax reporting effort I have to put into my MLPs by holding them within my IRAs.

    • good information. People have to be careful when investing in something like XTXI and XTEX.One is a C corp & other MLP.
      Is the buyout of SUG a done deal? I see nothing formally on the matter?

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