- just wondering if there are any implications to holding MLPs in an IRA ? I read somewhere that due to the "unusual" tax status of MLPs there are restrictions on the amount of partnership income that institutional investors, pension funds and IRAs can receive.
Hence not many IRAs hold MLPs.. any suggestions.. if given a choice between IRA and a regular account, where would u hold this ? thanks in advance..
Archie - given a choice it's best to hold MLPs in a regular account. If you hold them in an IRA there's the possibility of your IRA being taxed if you get more than $1000 per year in distributions. It's something called the Unrelated Business Income tax. You can get full details on this at http://www.ptpcoalition.org
While I found the PTP link to be of interest, I did not find the UBI reference. UBI is income outside of the specially advantaged area. So if the company has an ice cream stand on the side, those profits are UBI. The K-1 would list the UBI. In my limited experience the UBI portion is small or non-extant. But if there is UBI, you could have to pay regular income tax. http://www.fool.com/taxes/2000/taxes000908.htm gives some info, altho I think they over-make the point. The master partners are aware of the disadvatages of UBI and generally stick to the primary business.
Is it good to put PTPs into an IRA? I don't find it clear cut, but I have not. On the plus side, there is little worry of having to track the tax things other than UBI if that happens. So it is simple, and simple has advantages like not worrying about filing state taxes in a collection of states. On the other hand, the PTP tend to be tax defered investments anyway, so until you have received sheltered distributions that have given all of your money back, you are not paying a lot of taxes.
I am not expert in this area by any means, so if somebody can correct or improve on what I have said, please do.
I wondered who in his right mind would put a PTP into a margin account where it could be lent out causing weeping at tax time. If that PTP were in an IRA margin account, that would not be a problem. In fact, it would seem to get away from the UBI problem if it were actually lent out! I don't think that most brokers let you have margin accounts in an IRA, so this may be all theoretical. But I still wonder where the shares for shorting come from. Is it unsophisticated investors, or is it from mark-to-market dealers?