IRA's, MLP's and K-1's and taxes

[oceanlovin'ea]

My husband recently moved our IRA to Scotrade and has put the money in different stocks with the purpose of having dividends paid to us quarterly after he retires to help with living expenses.
He has recently read several articles about MLP investments and that if your UBTI is over $1000 taxes are supposed to be paid out of your IRA account. One article says not to worry about it because the likelihood of that happening is very low. One article says you would get K-l's from each investment.
He is really confused and I have never run across this before. I always thought you only had taxable income when you took the money out of your IRA.

I know some of you do investments too. Can anyone help explain this to us (me so I can explain it to him). He is really in a panic and thinking about moving the money to different funds.

Thanks

Linda

[Davc]

My husband recently moved our IRA to Scotrade and has put the money in different stocks with the purpose of having dividends paid to us quarterly after he retires to help with living expenses.
He has recently read several articles about MLP investments and that if your UBTI is over $1000 taxes are supposed to be paid out of your IRA account. One article says not to worry about it because the likelihood of that happening is very low. One article says you would get K-l's from each investment.
He is really confused and I have never run across this before. I always thought you only had taxable income when you took the money out of your IRA.

I know some of you do investments too. Can anyone help explain this to us (me so I can explain it to him). He is really in a panic and thinking about moving the money to different funds.

Thanks

Linda

An IRA is a special type of exempt entity. All exempt entities must deal with the UBI rules. If an IRA has UBI over 1K then the IRA is required to file a 990-T and pay the tax. Just like any other exempt entity.

[FEDUKE404]

MLP minefields abound

I've never quite understood why anyone, knowing the facts and not given a snow job by a broker, would ever deal with MLPs and the like within a tax sheltered account.

(Actually, other than helping the bottom line for their tax accountants every spring, the same logic also pretty much goes with MLPs within a "regular" investment account!)

Well, I guess one possible reason to have them within an IRA account is not having to deal with the annual K-1s that are issued and the special passive activity tracking rules for each MLP??

In any case, Davc is correct.

FE

[oceanlovin'ea]

Didn't know

He read and read and read but saw nothing about MLP's until this week.

So he is ready to sell the ones he has and then invest in some other companies that will not generate that kind of problems.

Linda

[FEDUKE404]

Shifty-eyed investment folks abound

He read and read and read but saw nothing about MLP's until this week.

So he is ready to sell the ones he has and then invest in some other companies that will not generate that kind of problems.

Linda

(Some) brokers only see $$$ in their clients and fail to tell them about those little future surprises involving K-1s and MLP issues. I had one elderly client with an otherwise reasonably simple tax return who "sent me this stuff that just arrived in the mail" to finish his taxes. Thank goodness my software did a pretty good job of reporting/tracking everything (of course, he had losses he could not currently take nor combine with other passive gains) but his tax prep costs went up exponentially.

He did call his broker and "explained" a few things to him. They reached an understanding, and he later reached a new investment advisor.

Also, other investments (Dyn commodity type stuff come to mind) can also have their own K-1s rattling around. Though not quite as bad as MLPS, they are "out there." It's always a good thing to eyeball the end-of-year stuff on brokerage statements for other income that does NOT show up on the usual accompanying Forms 1099-INT/DIV/B from the investment firm.

FE

[oceanlovin'ea]

bottom line

So the bottom line is that even in an IRA account these MLP's can generate income that has to be reported on form 990.

Since this is invested through Scotrade and the individual usually does their own trading, I would probably assume that Scotrade is not going to keep track and do the form 990. I have never done one so I would be in the dark too.

It sounds to me like it would be wise to move that money to other companies and steer clear of MLPs.

Is that what you are telling me?

Linda

[FEDUKE404]

Personal choices & personal consequences

So the bottom line is that even in an IRA account these MLP's can generate income that has to be reported on form 990.

Since this is invested through Scotrade and the individual usually does their own trading, I would probably assume that Scotrade is not going to keep track and do the form 990. I have never done one so I would be in the dark too.

It sounds to me like it would be wise to move that money to other companies and steer clear of MLPs.

Is that what you are telling me?

Linda

For the 990 issues, I would rely more on the wisdom of Davc, especially since I have no personal knowledge of how/if Scottrade handles such matters within their retirement accounts.

As for MLPs et al, the "beauty" is in the eye of the beholder. My personal opinion is there is a lot of unnecessary paperwork/time involved with such even in "regular" investment accounts. There must be equally attractive, and less complicated, investment options out there??

But those who sell such instruments, and reap the commissions, probably have a slightly different perspective.

It's probably like someone who owns a Porsche and can't benefit from the $20 oil changes at J Lube and similar. IF a client makes that investment choice, then the best we as tax folks can do is to prepare the returns properly (and charge accordingly!), and then perhaps explain to the client that other/simpler options may be worth some further scrutiny.

FE

[JohnH]

Interesting discussion. I have a couple of clients who get these ominous 990-T warnings because they have MLP's in qualified accounts (I certainly don't know why either, other than it being good for the advisor's bottom line). None of the trustees will do anything beyond send out the K-1s with the boilerplate and a ton of disclaiimers. I remember that at least one trustee for some reason wants the 990-T sent back to them after the taxpayer has paid to have it prepared, and the trustee then charges for something they do with it before it's submitted.

Beyond that issue though is the whole question of MLP's which FE mentioned. I've never seen anything but losses on any return investing in MLP's, even in unqualified accounts. Do I just have clients who are bad at choosing investment advisors, or is this experience more or less universal?

[Davc]

I remember that at least one trustee for some reason wants the 990-T sent back to them after the taxpayer has paid to have it prepared, and the trustee then charges for something they do with it before it's submittedl.

The trustee should be the one signing the 990-T!

[JohnH]

OK.
Thanks.
I knew there was some reason they wanted it sent back to them.

[Davc]

The IRA should pay for the preparation out of it's funds, if the client pays then that's a contribution.

[DaveO]

MLP's enjoy a special tax status where some of the payout is classed as a return of principal and not currently taxable. Having these inside an IRA compounds this in a way. Despite some very attactive yields I would avoid owning these in an IRA. Some ETF's are also organized as partnerships and will surprise you in a similar manner.

[oceanlovin'ea]

Thanks for all your imput on this issue. My husband sold the MLP's yesterday and invested in some "normal" stocks.

We aren't as much worried about how much is in the fund right now as how much the dividends will be paying us. He found funds he felt safer with and that had good dividend rates. So he will rest easier now.

Linda

[taxxcpa]

Mlp

I have some MLPs in my IRA and I plan to transfer one of them into my margin account as part of my RMD so the total will stay below $ 1000.

You can also own Closed end funds which invest in MLPs, and the UBTI does not apply to these dividends. There may also be some ETFs of this type.

One thing to keep in mind is that royalty trusts are NOT MLPs. These also pay high dividends. When the wells run dry, the royalties will end, but that could be long after you are dead.