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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? /... More
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  • Note on Own REITs and MLPs in a Tax Deferred Account 16 comments
    Mar 11, 2011 5:21 PM

    Lovely discussion of David Fish papers ( and inspired and pushed me to think once again and to write this note.

    I guess that there are no there are no MLPs and only few REITS in Champion list is simple because they suppose to pay  90+% of their earnings to holders, so they do not have “fat” to protect the distributions if something is going wrong with their .

    Yes, the tax advisers mostly right pointed that MLPs and REITs should not be owned in a tax deferred account, simply due to current favorable low taxation, effectively turning it into “ordinary” tax income upon withdrawal. But being a natural contrarian and long-term investor I held all my MLPs and REITs (as well as high-yield dividends stocks) in my retirement account. My points to do so are:

    a) I believe in compound interest and MLPs and REITs give me high yield (in average about 9.5% on my purchase price) safety distributions that I reinvest in the same or different stocks. I cover potential 30% withdrawal taxes within 5 years (my average a stock or unit holding time).

    b) If I pay UBIT, I fully deduct it from my taxes (I have to keep such record myself, my broker does not provide tax info for my retirement account).

    c) If I held my 15 different MLPs and REITs in regular (non-tax-deferred) account, the time I spend (or pay to accountant) dealing with K-1s for tax preparation cost me more than potential disadvantages for ownership these stocks in tax deferred account.

    d) I know thepresent MLPs and REITs taxation rules and IRA withdrawal rates, I do not know them at the time I have to withdrawal money from my retirement account.


    Please note that

    * I do need now income from distributions and distributions I receive in my regular and retirement accounts.

    * I’m not an accountant or tax professional. I use TaxCut from H&R Block to make my taxes (I found that it gives me more advantages than TurboTax).

    * I use Scottrade for my retirement account.


    Even remembering famous “Past Performance Does Not Guarantee Future Results” I think it will be fruitful to calculate probabilities to pay UBIT  let’s say on 1000 units for each of David’s CCC based on each company historical data (usually available on WWW or from IR department).


    Your comments are welcome!

    Disclosure: I have now 15 different MLPs and REITs (maximum 1000 shares) and I plan to buy more REITs or/and MLPs in future or increase my stake in existing positions. I don't know there market will be in 72 hours 8-)......
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Comments (16)
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  • Do I understand your correctly to say that if you exceed the UBTI limit of $1,000 in your retirement account(s), that you pay the tax due over that limit with a check from a personal checking account (not from the tax-deferred account) and then you deduct the amount of those taxes, paid by said personal check, on Sch. B of your 1040?
    11 Mar 2011, 05:43 PM Reply Like
  • Author’s reply » smartwidowlady,


    My IRA custodian should send me a form if I exceed the UBTI limit of $1,000 in the retirement account. I'd deduct the amount of those taxes on the line 58 of 1040 form (for 2010 year).


    Again I'm not a CPA and this is personal opinion.


    13 Mar 2011, 11:14 PM Reply Like
  • SDS...


    I had always understood that the tax payment must come from the IRA itself, via the custodian.
    14 Mar 2011, 12:05 PM Reply Like
  • Author’s reply » smartwidowlady,


    I don't know but you are probably right. A simple test - does IRA custodian pay taxes for foreign dividends? (I hadn't such situation, keeping non-US stocks in regular account).


    14 Mar 2011, 03:28 PM Reply Like
  • The foreign tax is withheld from most of my appropriate stocks in the IRA. Allegedly Canada does not withhold the 15% foreign tax from corporations held in an IRA. But my stocks from the UK, Chile, NZ and Australia have foreign tax withheld from the IRA.


    Thus, I cannot deduct them from my personal income tax via form 1116.
    15 Mar 2011, 11:10 AM Reply Like
  • Author’s reply » Hello,


    I'd include a foreign tax withheld from the IRA in 1040 form line
    "58 Additional tax on IRAs, other qualified retirement plans, etc. "
    As far as I know UK stocks dividends should not be taxed in IRA account.


    16 Mar 2011, 09:24 AM Reply Like
  • Why would you do that? If it's already been withheld from the IRA at source, and the net amount only is what is in your account, why would you again want to pay taxes on it? Line 58 adds to the taxes that you pay. Do you attach form 5398 to your tax return?


    I believe that I'm having foreign taxes withheld from one UK a/c. I just get the net amount in so can't say for certain. But I will check on that. Thank you for the tip.
    16 Mar 2011, 11:26 AM Reply Like
  • Author’s reply » Hello,


    1) I made mistake with line 58.
    2) I did NOT have any taxes from my IRA account so I guess only. My approach - all withholding taxes (federal, state, property,...., foreign including from IRA, UBTI, ....) should be considered on the same base.
    3) IRS has info about foreign taxes and I read a SA paper (sorry don't remember author & title).


    17 Mar 2011, 08:50 PM Reply Like
  • why only 1000 units of each mlp????
    21 Oct 2011, 12:05 PM Reply Like
  • The IRS limits MLP ownership in IRA's to total distributions of less than $1,000. If you own more you risk triggering a taxable distribution of your entire account. No way you can pay the tax outside your tax free account.
    4 Jun 2012, 12:23 PM Reply Like
  • Author’s reply » I know and keep below 1K$.
    4 Jun 2012, 03:48 PM Reply Like
  • Author’s reply » Good article on topic is
    23 Sep 2012, 06:53 PM Reply Like
  • SDS - I own MLP's and REITS in my tax deferred accounts as well. You need to pay the UBIT from your IRA not your personal account. If you pay it from your personal account include it as an IRA contribution on your return, just be sure you don't go over the limit on contributions.
    16 Nov 2012, 06:04 PM Reply Like
  • Author’s reply » Thank you Ed for good tip.
    18 Nov 2012, 11:22 AM Reply Like
  • That's a REALLY good tip, as I'd guess that paying taxes from your IRA would be considered a withdrawal, right Ed?


    Not that the AMOUNT would be a problem, but the paperwork would be...
    5 Apr 2013, 01:43 PM Reply Like
  • No, its not a withdrawal. The tax is owed by the IRA.
    5 Apr 2013, 02:37 PM Reply Like
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