MLPs in Retirement Accounts?

12/23/2013 7:00 am EST

Focus: MLPS

A reader of MLP Investing Insider asks editor Robert Rapier, "What are the pros and cons of holding an MLP in a retirement account?" Here, the MLP expert addresses that question.

Opinions on this are split. A big advantage of MLP investing is the potential for deferring taxes on earnings. However, the income in retirement accounts is already tax-deferred.

Further, it is possible that the retirement account could end up owing additional taxes on MLP distributions, reducing the potential return to investors.

Retirement accounts are taxed on "unrelated business taxable income" (such as partnership income) in excess of $1,000 in the aggregate. As a result, many financial planners recommend that you not complicate your retirement account with MLPs.

Others argue that the steady cash distributions are a safe, conservative way to build up the value of the retirement account over time, even if the account ends up having to pay some taxes.

The fact that the MLP isn't paying corporate income taxes is a significant advantage over time, with respect to its ability to generate higher income over time than would be possible for a corporation.

My view is that you first want to make sure that any of your fully taxable investments are protected in retirement accounts to the greatest possible extent, before you start to consider putting MLPs in your retirement account.

For example, investors with both, taxable, and tax-deferred investment accounts, would generally be better off holding MLPs in the taxable accounts, where their tax-deferral benefit would be more valuable, and where they would not generate a liability for unrelated business taxable income.

Of course, some MLP affiliates and/or sponsors are tax-paying corporations, and their shares can be held in a retirement account.

Some of our portfolio picks that are suitable for IRA accounts include Kinder Morgan (KMI), Williams (WMB), Targa Resources (TRGP) and Navios Maritime Partners (NMM).

All of these MLPs offer dividends and issue the 1099 miscellaneous income forms, rather than the more complicated K-1s from partnerships.

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