Tax Free MLP Distributions Are Misunderstood [View article]
I think that MLP investors are often so involved with tax deferral that they pass up on good investments because they will have to pay tax. People rarely complain about or reject salary increases even though that results in additional taxable income at ordinary income rates. I think the same thought process should be used with tax-shielded investments. If the investment makes good economic sense, and many MLPs do for many investors, then I favor making the investment. As far as I know, all distributions paid from MLPs are eventually taxed at ordinary rates. In general much or all of this tax is deferred until the units are sold. The only consideration for me is whether the after-tax yield of the MLP is better than the after-tax yield from an alternative investment. In addition, I also account for expected growth in unit price (or share price from an alternative). When the before tax yield is over 9% (as it is now for BBEP), it's very hard to find an alternative that will match that even after considering the taxes. I worry a lot about the investment fundamentals, and only a little about tax implications, especially when it's only a question of when the tax will be paid and not the tax rate that will be paid.
The Facts Are In - MLPs Work Great In IRAs [View article]
Ken,
Are you saying that the recapture UBTI that you believe is taxable to IRAs is already reported as UBTI on the K-1 (presumably on line 20V). That would be great if correct, since then the negatives I continue to see would include the recapture amounts. I don't think that's what you've been saying, but I'd appreciate a clarification one way or the other.
The Facts Are In - MLPs Work Great In IRAs [View article]
Phil,
It would change my assessment, but it probably wouldn't change my conclusion that high-yielding MLPs belong in IRAs to the extent that you don't have taxable accounts to hold them. I would still look at the net return including extra tax that had to be paid in the IRA, and this would be larger. These MLPs would still yield a high net return, but not as high as my current analysis which only includes the (basically nonexistent) annual UBIT. Again, if I thought recapture was proper for IRAs I would include it in my calculation, but I don't and neither does my custodian (Schwab). In the end, it's Schwab call to make.
The Facts Are In - MLPs Work Great In IRAs [View article]
Reel Ken,
Thanks for bring this source up. I meant no one ever reported UBTI on SA that I was aware of. It seems that a few people are paying a small amount of UBTI tax (UBIT). I wouldn't let this small amount of UBIT keep me from putting an MLP in an IRA, but maybe others would.
The Facts Are In - MLPs Work Great In IRAs [View article]
Thanks very much for your comment. All your points are well said and taken, especially your last two points about "taxes are just taxes" and that the overall concern should be the quality of the investment, not tax implications.
The Facts Are In - MLPs Work Great In IRAs [View article]
Ken,
I am an FSA and a retired enrolled actuary. I haven't listed that on my profile, but I am listed in the Society of Actuaries membership directory. You're right that I'll be happy to take on a CPA or tax attorney on retirement matters. I'm sorry that I didn't realize you were an enrolled actuary yourself. Regardless, what I have read of the Code and the instructions to form 990-T leaves me comfortable that Schwab is preparing my 990-T correctly. It does not make sense to me that I would have to attach a form 4972 to my personal tax return when the tax paying entity reponsible for the UBTI tax is the IRA, not me the owner. Everything I know about the way IRAs are taxed suggests that recapture for an IRA is meaningless. Thus, I am very comfortable that Schwab is doing things correctly. At a certain point professionals who disagree can only resort to doing what makes them feel the most comfortable. For me, I'm very comfortable relying on Schwab's preparation of the 990-T. I am comfortable with this because: 1. I think they are doing things right, 2. The code requires this filing to be done by the custodian (Schwab), not the owner (me). 3. It is only the custodian who can pay the tax out of the IRA if there is any to pay. Note that the tax MUST be paid out of the IRA, if I were to pay the tax separately then money would be left in the IRA that could continue to earn interest on a tax deferred basis. The whole of idea of this UBTI tax is to pull the money out of the IRA. 4. There is no tax to pay, and it's very unlikely there will be tax in the future.
The Facts Are In - MLPs Work Great In IRAs [View article]
Ken,
As you suggested I reviewed page 10, Line 4a of the 990-T instructions. It is my opinion that IRAs are not taxed on the "sale, exchange, or other disposition of property". I even very briefly reviewed IRC 1245 and I feel in good faith that the capital gain net income referred to in this section does not apply to IRAs. This makes sense to me because cap gains from other sources (i.e., sale of stock) are not taxed in an IRA. Again, I am not an accountant, but I am a retired pension actuary.
The Facts Are In - MLPs Work Great In IRAs [View article]
Does Tax Package Support fill out 990-Ts? If so, I'll try to talk to them. If not, I'll take Schwab's advice that professionals who actually have current experience with 990-Ts are the best source for the intricacies of taxation of MLPs within IRAs.
The Facts Are In - MLPs Work Great In IRAs [View article]
FTR, I don't ignore it, I just don't think it applies. The recapture is all about paying tax, at ordinary income rates, on distributions received during prior years that have not been subject to tax already. In an IRA no distributions into the IRA are ever subject to tax until the assets are distributed to the owner. No gains are subject to tax. That is why there is no place on the 990-T for recapture. Bottom line is that you and I disagree on the tax treatment of distributions made internally from an MLP to an IRA. That's OK. I believe in good faith that Schwab is doing things right when they fill out, sign, and file my 990-Ts. So far, that has never resulted in any tax being paid from my IRAs, in spite of the fact that their have been partial withdrawals every year and full withdrawals in both 2011 and 2012. Maybe I'll be surprised this year and Schwab will take out money to pay tax due, but I would lay heavy odds against this. Meanwhile, there have been no reports of anyone having to ever pay tax on MLP assets, and many of us have had competent professionals (Schwab) do the 990-Ts. I won't be worrying much about this unless and until I see that change.
The Facts Are In - MLPs Work Great In IRAs [View article]
I'm not a tax attorney either, just a pension actuary (retired). I reviewed IRC 469, and it applies to passive activity. I did not find any mention of UBTI in IRC 469, but maybe I missed it. I can only say, again, that when I asked Schwab specifically about combining negatives and positives within a single IRA they said that they do. Maybe the person I spoke to was wrong about their practice. Fortunately, since my UBTIs are negative, this does not apply to me directly, at least not this year!
The Facts Are In - MLPs Work Great In IRAs [View article]
Schwab asks for the entire package, and I send it to them. Therefore, at least for my accounts so far, either Schwab is completely the sales schedule and still finding a negative UBTI or Schwab does not think the sales schedule applies for IRAs. I'm covered either way.
The Facts Are In - MLPs Work Great In IRAs [View article]
Reel Ken is a true expert on MLP taxation for taxable accounts. Obviously he and I disagree on proper taxation for MLPs in IRAs, since I think there is no additional tax when MLPs are sold from an IRA. Fortunately, I have Schwab to decide this for me, and it's even more fortunate that I have never seen Schwab decide there is ever any tax duel
Tax Free MLP Distributions Are Misunderstood [View article]
Tax Free MLP Distributions Are Misunderstood [View article]
If the investment makes good economic sense, and many MLPs do for many investors, then I favor making the investment. As far as I know, all distributions paid from MLPs are eventually taxed at ordinary rates. In general much or all of this tax is deferred until the units are sold. The only consideration for me is whether the after-tax yield of the MLP is better than the after-tax yield from an alternative investment. In addition, I also account for expected growth in unit price (or share price from an alternative). When the before tax yield is over 9% (as it is now for BBEP), it's very hard to find an alternative that will match that even after considering the taxes.
I worry a lot about the investment fundamentals, and only a little about tax implications, especially when it's only a question of when the tax will be paid and not the tax rate that will be paid.
The Facts Are In - MLPs Work Great In IRAs [View article]
Are you saying that the recapture UBTI that you believe is taxable to IRAs is already reported as UBTI on the K-1 (presumably on line 20V). That would be great if correct, since then the negatives I continue to see would include the recapture amounts. I don't think that's what you've been saying, but I'd appreciate a clarification one way or the other.
The Facts Are In - MLPs Work Great In IRAs [View article]
It would change my assessment, but it probably wouldn't change my conclusion that high-yielding MLPs belong in IRAs to the extent that you don't have taxable accounts to hold them. I would still look at the net return including extra tax that had to be paid in the IRA, and this would be larger. These MLPs would still yield a high net return, but not as high as my current analysis which only includes the (basically nonexistent) annual UBIT. Again, if I thought recapture was proper for IRAs I would include it in my calculation, but I don't and neither does my custodian (Schwab). In the end, it's Schwab call to make.
The Facts Are In - MLPs Work Great In IRAs [View article]
Thanks for bring this source up. I meant no one ever reported UBTI on SA that I was aware of. It seems that a few people are paying a small amount of UBTI tax (UBIT). I wouldn't let this small amount of UBIT keep me from putting an MLP in an IRA, but maybe others would.
The Facts Are In - MLPs Work Great In IRAs [View article]
The Facts Are In - MLPs Work Great In IRAs [View article]
I am an FSA and a retired enrolled actuary. I haven't listed that on my profile, but I am listed in the Society of Actuaries membership directory. You're right that I'll be happy to take on a CPA or tax attorney on retirement matters. I'm sorry that I didn't realize you were an enrolled actuary yourself.
Regardless, what I have read of the Code and the instructions to form 990-T leaves me comfortable that Schwab is preparing my 990-T correctly. It does not make sense to me that I would have to attach a form 4972 to my personal tax return when the tax paying entity reponsible for the UBTI tax is the IRA, not me the owner. Everything I know about the way IRAs are taxed suggests that recapture for an IRA is meaningless. Thus, I am very comfortable that Schwab is doing things correctly.
At a certain point professionals who disagree can only resort to doing what makes them feel the most comfortable. For me, I'm very comfortable relying on Schwab's preparation of the 990-T. I am comfortable with this because:
1. I think they are doing things right,
2. The code requires this filing to be done by the custodian (Schwab), not the owner (me).
3. It is only the custodian who can pay the tax out of the IRA if there is any to pay. Note that the tax MUST be paid out of the IRA, if I were to pay the tax separately then money would be left in the IRA that could continue to earn interest on a tax deferred basis. The whole of idea of this UBTI tax is to pull the money out of the IRA.
4. There is no tax to pay, and it's very unlikely there will be tax in the future.
The Facts Are In - MLPs Work Great In IRAs [View article]
As you suggested I reviewed page 10, Line 4a of the 990-T instructions. It is my opinion that IRAs are not taxed on the "sale, exchange, or other disposition of property". I even very briefly reviewed IRC 1245 and I feel in good faith that the capital gain net income referred to in this section does not apply to IRAs. This makes sense to me because cap gains from other sources (i.e., sale of stock) are not taxed in an IRA. Again, I am not an accountant, but I am a retired pension actuary.
The Facts Are In - MLPs Work Great In IRAs [View article]
The Facts Are In - MLPs Work Great In IRAs [View article]
In an IRA no distributions into the IRA are ever subject to tax until the assets are distributed to the owner. No gains are subject to tax. That is why there is no place on the 990-T for recapture.
Bottom line is that you and I disagree on the tax treatment of distributions made internally from an MLP to an IRA. That's OK. I believe in good faith that Schwab is doing things right when they fill out, sign, and file my 990-Ts. So far, that has never resulted in any tax being paid from my IRAs, in spite of the fact that their have been partial withdrawals every year and full withdrawals in both 2011 and 2012. Maybe I'll be surprised this year and Schwab will take out money to pay tax due, but I would lay heavy odds against this.
Meanwhile, there have been no reports of anyone having to ever pay tax on MLP assets, and many of us have had competent professionals (Schwab) do the 990-Ts. I won't be worrying much about this unless and until I see that change.
The Facts Are In - MLPs Work Great In IRAs [View article]
Fortunately, since my UBTIs are negative, this does not apply to me directly, at least not this year!
The Facts Are In - MLPs Work Great In IRAs [View article]
The Facts Are In - MLPs Work Great In IRAs [View article]
The Facts Are In - MLPs Work Great In IRAs [View article]
The Facts Are In - MLPs Work Great In IRAs [View article]