2 MLP Funds For Your Retirement Planning Portfolio

by Richard Band | December 20, 2013 2:27 pm

I like to take questions from readers, as it gives me a chance to answer some of your investing concerns. Here’s one today that a lot of people saving for retirement are asking:

If Roth IRAs are tax-free, how come I can’t hold master limited partnerships (MLPs) in them?

Because of a quirk in the tax law, Uncle Sam may deem part of your MLP earnings to be Unrelated Business Taxable Income. As stated in IRS publication 598 [1] under “Organizations Subject to the Tax,” if you hold an MLP inside a retirement account, you’ll owe income tax on any UBTI credited to you above $1,000 a year. IRAs including Roth IRAs are subject to this tax. So you should only hold individual MLPs in a taxable account.

And because individual MLPs issue a complex form called a K-1 at tax time instead of a 1099, you may also need a professional tax preparer to help you place all the numbers in the right slots on your return.

Of course, there’s a way around both of these complications: MLP funds. The drawback to a fund is the added layer of operating expenses, which reduce your cash yield. But a fund gives you some important benefits:

• Instant diversification among several dozen MLPs.
• No cumbersome year-end K-1. The fund sends you a simple 1099.
• No UBTI. Appropriate for retirement accounts.
• Dividends may be treated partly (or even mostly) as a tax-free return of capital.

Among the MLP funds currently available, I’m keenest on Alerian MLP ETF (AMLP[2]) and Tortoise MLP Fund (NTG[3]). AMLP is the more conservative vehicle, since it doesn’t use leverage (borrowed money).

On the other hand, NTG will likely throw off a higher yield. Based on its most recent distribution NTG is yielding about 6.2% at the current market price while AMLP is yielding about 5.9%.

As a closed-end fund, NTG can easily wander away from its net asset value (up or down). AMLP, as an exchange-traded index fund, will likely stick pretty close to NAV, because big institutional investors—not you or I—have the right to create or redeem shares at NAV.

Source URL: https://investorplace.com/2013/12/retirement-planning-roth-ira-rules-mlp-rules/

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