The subject says it all. I am looking to start adding dividend bearing stocks to my 401k and moving away from the more erratic so-called growth stocks. I am not an experienced investor, but I know this type of stock is very different from regular ones. Notwithstanding the usual up and down risks of buying anystock, does it make any sense to put a stock like MMP in a 401k plan (which is already pretty much exempt from taxation)? Would I end up being tax disadvantaged?
Appreciate any input. Thanks.
From Raympnd James primer on page 12:
"One of the most attractive features of MLP income is that it is already largely tax-deferred, so there is no need to put it into an IRA to receive the tax benefit.
Buying MLPs in an IRA would be similar to buying tax-free municipal bonds in an IRA – you would not benefit from the benefit. The most compelling reason, however, is that IRAs are subject to federal income tax on unrelated business taxable income, or “UBTI.” UBTI is income earned by a tax-exempt entity (such as an IRA) that does not result from tax-exempt activities."
From the Alerian Primer on page 13:
"Retirement accounts and other tax-exempt investment vehicles are also restricted in their ability to invest in the sector because MLPs generate UBTI. If UBTI exceeds $1,000 for a tax-exempt entity, investors may be liable to pay taxes on that income. "
I can see how it could be, that IF the tax were on distributions, then withdrawal of those distribution could change the tax treatment. But if the tax is on UBTI, then how can withdrawing the distributions from the IRA change anything? All MLP produce K-1's with UBTI numbers. How does the K-1 producer even know the units are in an IRA and being withdrawn? It is my impression from the UBTI data base that UBTIs are being credited to you much more frequently than once per quarter. So would that not also mean that you are being hit with UBTIs even BEFORE you get your distributions?
Please provide links to the sources of your information as I have provide links to mine.
dontowenothin wrote that a trick to not paying taxes is to "Not own more than the shares of Multiple MLP's that in total distribute more than $1k/year."
From what source are you getting that the tax is on 'distributions' - when the sources say the tax is on 'UBTI'????
The Wachovia primer contains this on page 17:
"Tax-exempt investment vehicles such as pension accounts, 401-Ks, IRAs, and endowment funds should not own MLP units because MLPs generate unrelated business taxable income (UBTI). This means MLP income is considered income earned from business activities unrelated to the entity’s tax-exempt purpose. If a tax exempt entity receives UBTI (e.g., income from an MLP) in excess of $1,000 per year, the investor would be required to file IRS form 990-T and may be liable for tax on the UBTI."
back to the original poster -- other MLP options for an IRA/401k that sidestep the whole UBTI issue would be KMR, which pays distributions in stock, or a fund/etf that invests in MLPs, like KYE.
MLP Primers used as sources in upcoming message:
The Wachovia primer http://www.naptp.org/documentlinks/071508wacoviaprimer.pdf
The Raympnd James primer http://www.naptp.org/documentlinks/RaymondJamesGuidetoMLPs.pdf
The Alerian Primer http://www.naptp.org/documentlinks/ACM_MLPPrimer.pdf
The Citi Primer - no current link
If you are taking distributions from your IRA ,there should no be any problem with the distributions from an MLP . Just as long as your IRA distributions equal or include within them the dollar amount of the MLP dividend.
MLP are better income producers at this time than bonds and along with telecoms are a good source for income out of an IRA , while not disturbing the stock itself. Ideally, a distributing IRA's should not require one to sell stock to get a distribution .A structure that does this can be achieved with conservative investments at the present time in gas pipelines and electric utilities and telecoms.
dontowenothin wrote "If you are taking distributions from your IRA, there should not be any problem with the distributions from an MLP. Just as long as your IRA distributions equal or include within them the dollar amount of the MLP dividend."
I have previously given links to the MLP primers [if that link is needed again - see http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_E/threadview?m=tm&bn=6201&tid=8493&mid=8493&tof=6&frt=2]. The primers come from legit sources - Wachovia, Allerian Capital [the makers of the AMZ index], Merrill Lynch, and Raymond James. Every single primer mentions that fact that MLPs in IRA produce UBTIs - and UBTI over $1,000 triggers a tax on the total amount of your UBTI - and it is not dependent on whether money is kept in the IRA or withdrawn.
I have yet to see any mention that withdrawals from the IRA would have any effect on the taxation of UBTIs. If dontowenothin has a source for this claim that IRA withdrawals has the effect of escaping UBTI taxation, then dontowenothin should provide a link to his information, just as I have provided a link to my sources of information.
Dontowenothin - I hope you are right - because this would be great news. But there are logical reasons for me to believe you are wrong - besides the fact that the primers are in disagreement with what you believe to be the case. Your statement would imply that the taxation of MLPs is based on their distributions. But outside an IRA, the taxes are NOT based on the distributions. So - using logical [and using logic is a dangerous thing to do when it comes to taxes] - why would the taxation of MLPs inside an IRA be based on the distributions?
Is MMP Suitable for Individual Investor's 401k?
No. The problem is that MLPs can produce UBTIs - and UBTIs over $1000/year will cause you to file and pay taxes on income in a 401K or IRA on those UBTI dollars [and that is in the year in which the UBTI exceeds $1000 - not the year in which the money is withdrawn].
Most MLPs produce negative UBTIs - so that is not a problem for MOST. but MMP has a recent history of producing strongly positive UBTIs after it is held for a short period of years.
More info on UBTI can be found in the MLP primers - and a list of links to those primers can be found at http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_E/threadview?m=mm&bn=6201&tid=8493&mid=8493&tof=24&frt=2
I can not test the link in preview mode - so in case the link does not work, the info is posted on the EPD board in the thread 'What is the MLP specific "due diligence"?' that was posted on 9-25-09 [so you will have to go to the first page of the prior/old messages to find that thread]
There is a link to some UBTI history given in a different message in the same thread - http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_E/threadview?m=mm&bn=6201&tid=8493&mid=8501&tof=24&rt=2&frt=2&off=1
If you are new to MLPs, then read the whole thread [at least those messages of little use are short] and not just the two messages to which I gave a link. I failed to generate an interest in other investors adding to the info I gave - so the thread fell short of delivering all the information I hoped to generate in the intro.