Would like anyone's thoughts and input on buying PTP's inside an IRA

[WhiteOleander]

I have a client who called. He has an IRA that he wants to invest in Limited Partnership PTP's. He says someone told him that it would cause a taxable event for him. I don't think that is correct. He is over 70.5 and has been taking RMD's for awhile. But, just the act of investing in the PTP would not cause anything to be taxable.

However, I was wondering about something. If the PTP's are non-liquid, and there is no income available from them, how would he be able to take the RMD? Say for instance that the RMD is 2000.00 but there isn't that much cash in the IRA. He can't sell any of the PTP's to get the distribution. What would happen?

Would he owe the 50% penalty for not taking the RMD? I think yes.

I'm not sure that PTP's are a good idea for my client. Anyone have any experience in this scenario? Any thoughts?

Thanks

[JG EA]

I have clients with PTP's inside an IRA. But its not the whole IRA just a part.
The RMD is based on 12/31 value of the previous year so would your senario have a lower value?

There is a previous posting about these being in IRA's. I asked about it because we were getting the K-1's and it caused confusion in my mind as to why.

http://www.thetaxbook.com/forums/showthread.php?t=8385&highlight=send

[WhiteOleander]

Thank you so much JG. I had not seen that thread. It gives me alot of info to help my client.

[Snaggletooth]

OK I think.

I think this is O.K. and shares of this limited partnership may be taken OUT of the IRA without converting to cash. The FMV of the LTP will appear on the 1099-R just as if the distribution had been in cash.

The above-described arrangement is fine with the IRS, so long as it is within the policy of the IRA custodian to do so.

When I became educated to how much 401k/IRA administrators were skimming off the top, I changed everything in my IRA from mutual funds to individual stocks. There are some 25-30 stocks in my IRA, thus I have achieved all the diversification I need without the 3-4% fees. I am a long way from having RMDs, but I have begun taking out 2-3 stocks every year. These come out at the market value of the stocks as of the day of transfer, and my 1099-R at the end of the year is for the total of these market values just as if they had been sold.

[JSLATER]

I copied this from another board I am on. I knew there was a taxable event involved in PTP's in IRA's with UBTI, but could not explain it. I doubt, in most cases, that it would be a significant amount. In my experience, unless you turn them over, PTP"S are mostly return of capital. The key word in the explanation below is "income." UBTI for most holders of PTP's on the K-1 is minimal. The answer below is correct, but the example, to me, is misleading.

>"I am contemplating purchasing shares of a publicly traded partnership (PTP) in my IRA. While the purchase and sale of securities within an IRA is normally not an issue for taxes, I seem to recall that there are some differing or special rules applicable to investors who hold PTP shares within their IRA's. Is this correct? If so, what are those requirements and procedures?

Thanks much.

Yes, there are special rules.

If in total, the MLP's you hold in all of your IRA's (if you have more than one) generate income in excess of $1,000, this excess will be taxed as Unrelated Business Tax Income, or UBTI. There are a couple of unique characteristics of this special tax.

1. It is taxable to your IRA...not to you, so your IRA custodian must file a Form 990T and pay any tax due from the IRA, and most custodians will charge a not-insignificant amount to file this form on your behalf.

2. This is taxed at trust rates. Thus, if your MLP's held in your IRA(s)had a combined net income of about $10,000 and more, the Fed tax rate would be 35% at this level of income.

One of the benefits of MLP's, particularly to retirees, is that most of the distribution is a return of capital (not taxable), due to the MLP's usually very high depreciation expense relative to their revenue. You lose this benefit by holding it a tax deferred account, where all withdrawals, except for any basis, comes out as ordinary income."<

[OtisMozzetti]

When I became educated to how much 401k/IRA administrators were skimming off the top, I changed everything in my IRA from mutual funds to individual stocks. There are some 25-30 stocks in my IRA, thus I have achieved all the diversification I need without the 3-4% fees. I am a long way from having RMDs, but I have begun taking out 2-3 stocks every year. These come out at the market value of the stocks as of the day of transfer, and my 1099-R at the end of the year is for the total of these market values just as if they had been sold.

I guess that the Trustee of your IRA really loves dealing with you...

On a more serious note, I am aware of a major corporation whose 401(k) included a choice to buy that company's stock (a fund consisting of that company's stock). The quarterly statements from that 401(k) always consisted of quarter-end values and did not track any transactions. After a while, I figured out that there was around 1% of the stock FMV--i.e. A LARGE WAD OF MONEY JUST FOR HOLDING A LARGE WAD OF ONE ISSUE OF STOCK--coming out no matter what contribution transactions were occurring. Therefore, at age 55, she my wife took a lump sum distribution of the 401(k) with the stock itself delivered. Yes, there was a tax bill to pay that year, but the vast majority of the account value was the NUA (net unrealized appreciation) above the "Trustee's cost" of that company stock. So, she's never yet paid tax on that NUA, and the NUA and post-distribution appreciation will/may be taxed as capital gain not as ordinary income.

[OtisMozzetti]

401(k) administrators skimming off the top for diddeley

Diversification of investments was obtained by other means.

[JohnH]

I have one client who receives K-1's from a PTP in an IRA along with a letter explaining that the 990-T must be filed if the totals exceed $1K, but then the kicker comes in -->

This custodian DOESN"T OFFER to handle the 990-T filing, even for a fee. They require the client to get the 990-T filed and then send it to them so they can pay the tax out of the plan. Talk about passing the buck! Why would anyone deal with a company like that?

I've explained to the client that paying for the 990-T preparation and then also paying the tax is effectively reducing his actual net return on the PTP, but somehow his financial advisor has him convinced that this is still a good idea. The only thing I'm convinced of is that there are a lot of gullible people out there, coupled with a lot of incompetent (or dishonest) financial advisors.

[WhiteOleander]

Thanks everyone for your input and experiences with investments like this.

[Snaggletooth]

Otis Elevator

I guess that the Trustee of your IRA really loves dealing with you...

Otis, believe it or not, this is a concern. When I do business with a broker, plumber, mechanic, or anyone else, I want them to make money. This is greedy on my part because when I pick up the phone and need them, I want them to respond to me just like I respond to my customers.

And I haven't figured out how my broker can make any money, especially with a buy-and-hold strategy with individual stocks. So I do have a few mutual funds that I have bought through my broker - but these are NOT in an IRA or 401k where the insurance company puts money into a "shrink-wrapped" version of mutual funds.

I am looking for suggestions here. I do want my broker/custodian to make money but I don't want them running off with a 3-4% fee (even in loss years) and making more money off the account than I do, when it's my money. Is there a happy medium?

[JohnH]

I just had to follow up on this string in the aftermath of a conversation I had today. (Gotta vent somewhere) I reviewed the situation with the client, along with a recommendaiton that he might want to consider finding someone else to handle the return. When he asked for a recommendation I suggested that he ask the guy who sold him this mess to recommend a preparer.

My thinking was that if the guy is putting clients into this type of investment and really knows what he is doing, he should have enough knowledge to realize it's unusual. If so, he should know whom to send them to in order to be sure their returns are prepared correctly. If he can't provide this type of assistance, then maybe he doesn't know very much about what he's doing, or is just recommending the "investment du jour" that his firm is pushing at any given time.

Unfortunately, the client told me that he had learned more about this in the 15-minute conversation with me than he knew after having spent hours with the advisor. Then the client tells me the same guy now has him putting big bucks into an oil & gas partnership that's only open to certain people who have an INSIDE TRACK with the promoter. He has a huge portion of his total investments in this scheme and is on the hook to put in more in the future. Talk about rolling the dice.

I couldn't help but explain that the whole relationship smells to high heaven and I really don't want to be bothered with it. Anybody looking for a client who stands a good chance of having some huge loss carryforwards and a really bad attitude in the near future?

[Snaggletooth]

Don't Back Off

John, it really sounds like this guy has given you a vote of confidence. I don't know that I would turn him away.

I would have a clear understanding that this stuff is full of extra tax problems and disclosures, and give him a preview of what he can expect. And that the road ahead will make him furious at times, and that he will have to endure this, and not John H.

I do believe brokers/promoters who have always sold high-risk/high-commission financial products have traditionally had difficulty invading IRAs, SEPs, and 401Ks. And now they are trying to find ways to tap into this huge reservoir of money.

[FEDUKE404]

Reason for PTPs in first place is ????

...My thinking was that if the guy is putting clients into this type of investment and really knows what he is doing, he should have enough knowledge to realize it's unusual. If so, he should know whom to send them to in order to be sure their returns are prepared correctly. If he can't provide this type of assistance, then maybe he doesn't know very much about what he's doing, or is just recommending the "investment du jour" that his firm is pushing at any given time.

John - I had a similar experience. Started preparing some out of state returns for the parents of a client, and as usual I asked to review the prior couple of years tax returns.

The parents are in their late 80's, mentally very sharp, and had been placed into a PTP which generated some "income" and, of course, those pesky "you've got 'em but you can't use them until....." losses. I asked them WHY they ever made such an "investment," especially at this stage of their lives. (BTW - very modest total income, not millionaires or anything close.) Essentially, they were surprised and then outraged since they had only been told the new "investment" would generate extra income for them. They had no idea what that strange "K-1" thing was that came in the mail....

From a personal standpoint (thinking as a tax person) I cannot envision getting into a PTP with all of the required paperwork/time to prepare a correct tax return and to carry the separate losses forward for perhaps many years. I would love for anyone (other than the $ale$man of the PTP) to explain the underlying logic of putting a PTP into an IRA account, especially with the potential landmines lying around in that scenario.

After reading some of the other posts on these boards, I guess it is likely some tax folks just slide the PTP numbers in as regular Sch E page 2 stuff, crank out an incorrect Form 8582, say "it's always worked before," and life goes on.

I daresay there are probably many tax experts out there who do not even realize the difference between a PTP and a "regular" investor limited partnership arrangement.

Oh well - just had to get this off of my chest. Sorry for the rant!

FE