Negative UBIT in IRA

[jimfrombx]

Negative UBTI

On Investorvillage they have individuals send in their K1 info annualy on line 20V whether negative or positive for UBTI. You do not have to be a paying member
of IV to contribute and the results are shared with the contributors only. If I remember correctly over 70% are negative so depending on your MLP selection
you should not have any tax reporting issues in an IRA.
One of the reasons some individuals buy MLP's in their IRA is because that is where they have their money. Retired individuals who have accumulated sizable
amounts over their lifetimes in their 401K and IRA's have rolled them over and that is the bulk of their investable funds. Many MLP's have had some pretty
nice yields which have increased every year as well as having capital appreciation, so they have been very good investments.
Commisions on MLP's are the same as stocks so they generally don't necessarily fatten the brokers pockets, but the Tax Industry does well as the charges
on MLP's (read K1) can get pretty high depending on the preparer. I worked for Block years ago and they charged $50 per K1, don't know what the fees
are today.

[JohnH]

Thanks for those last two posts. At least it clarifies some of the reasoning behind why they show up in some of my clients' retirement accounts. It is unsettling to note that none of the investment advisors I have ever asked were able to provide answers this concise.

The small amounts always puzzled me as well and that question was answered, although I still question the overall wisdom of allocating relatively small amount to an investment which creates this potential level of tax complexity. And even if it does extremely well from an investment point of view, it's still a relatively small investment and thus not very meaningful in terms of effect on the overall portfolio. Seems to me it gives more of an llusion of diversification rather than actually achieving that goal. But then I'm pretty conservative and I gravitate toward simplicity when it comes to financial matters.

[taxxcpa]

Small investments

If you have a $ 500,000 IRA, it should be diversified. One investment guru I've read in Seeking Alpha suggests no more than 2% in any one stock. That would mean no more than $ 10,000 in an MLP for a $500,000 IRA or $ 5000 in a $250,000 IRA.

I invest predominately in dividend-increasing stocks with a minimum of 3% yield and a history of increasing dividends frequently. I also look at the current ratio, the rate of dividend increases and the payout ratio.

I also invest a lesser percentage in REITs, DBCs, Royalty Trusts and MLPs, mostly in a rollover IRA.

I believe in diversification, so I have over 50 different stocks plus some CDs, GNMAs and bond funds.

I see nothing wrong with small amounts as long as they are not so small that the commissions become a significant part of the cost.

[JohnH]

I'm totally with you on the diversification, but I keep it a lot simpler. Virtually all my equity allocation is in Vanguard Total Stock Market Index for diversification. All I do is occasionally rebalance between Equity, Cash & C/E, and Real Estate, allocating more to the Cash & C/E side as I get older.

[taxxcpa]

Your approach is probably best for most people. I like doing the research to pick stocks and with stocks that constantly increase dividends, like the ones in David Fish's worksheets http://dripinvesting.org/Tools/Tools.asp I've been able to pick a lot of winners that provide me with a rising income. I'm semi-retired so I have plenty of time to evaluate investments.

With rising dividends, you are better off than with cash and most fixed-income investments since the dividends keep growing whether the stock market rises or falls. The "champions" listed in http://dripinvesting.org/Tools/Tools.asp have been rising for 25 to 50 years without missing a single year.

If you invest in a no-dividend growth stock you might make a killing, but only if you sell it at some point.

[JohnH]

Yes, I'm very much a lazy investor so I'm playing it safe. I did make a tiny exception to VTSMX on the equity side for two reasons. I bought a small amount of stock in the company my daughter works for, just as an incentive for me to keep up with what's going on with her employer. Plus I own some Berkshire B shares.

I think the BKR-B is a great vehicle for no-dividend growth and I like Warren Buffet's investment acumen even though I disagree with him politically. What do you think of the idea that it's easy enough to turn a no-dividend stock into a dividend-paying equivalent by simply selling a few shares from time-to-time? (provided the transactions are large enough that the fees don't comprise a huge percentage of the sale)

[taxxcpa]

You might go to Yahoo finance and create a comparative chart showing your fund's performance vs DVY, an ETF of dividend-achievers.

A better measure would be if you could compare them on a total-return basis showing the effect of reinvesting dividends in both.

Here is a link you might be able to use, but I'm not sure that it has mutual funds or ETFs. You might try it on a couple of stocks.

http://longrundata.com/index.php