Ask a Fool: Should You Fill Your IRA With MLPs?

In the following video, Motley Fool energy analyst Joel South fields a question from a Fool reader, who asks, "What is your opinion of pipeline MLPs in an IRA up to the IRS limit?"

One of the MLPs discussed is the one created by Energy Transfer Partners. The surge in oil and natural gas production from hydraulic fracturing and horizontal drilling is creating massive bottlenecks in takeaway capacity. However, this problem for producers creates a massive and immensely profitable opportunity for midstream companies. Energy Transfer Partners helps alleviate the glut in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this midstream.


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Comments from our Foolish Readers

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  • Report this Comment On February 08, 2013, at 10:49 AM, Niessenwr wrote:

    Interesting and consistant with my investment approach which is heavily into MLPs . . . for the sound (and profitable) reasons he mentioned. I do wonder what he meant by the "IRS limit" on MLP holdings . . . if that is the UBTI, I am aware of that (although it applies to the total UBTI of all holdings in one's sheltered accounts and, in my case, is always very much a negative number). But is there another "limit?"

  • Report this Comment On February 08, 2013, at 11:07 AM, TMFTheWhisperer wrote:

    Niessenwr,

    No there is not another limit, the IRS limit mentioned was part of the question asked and regards the tax deductible amount ($5000- $6000) one can contribute each year. Since it is a small amount, the UBTI would be negligible.

  • Report this Comment On February 08, 2013, at 2:28 PM, Niessenwr wrote:

    Thank you for responding.

    Note, however, that my "IRA" (at this time in my investing life) includes roll-overs of 401K money etc. so I have quite a bit in MLPs . . . but, with their well-hedged commodity and outstanding dividend income (and its growth) plus a strong potential for capital appreciation . . . I view these as "buy and hold" securities. So as long as the UBTI is low (it IS a killer if it gets above the $1,000 limit with a VERY progressive tax structure), these are real winners!

  • Report this Comment On February 09, 2013, at 2:17 PM, Sumflow wrote:

    First off near the end it sounds like he says perfectly illegal to do so. Did anyone else hear that?

    Second off, it also sounds like the investor is expected to make a one time investment that will not grow, because if they put the limit every year, or reinvest distributions over twenty years, or Gov changes the ratio. UBTI might indeed become a problem from putting the wrong security in a sheltered retirement account.

    What about a Roth, is UBTI a problem there. What different effects does Death have on if it is in or out of a sheltered account?

  • Report this Comment On February 09, 2013, at 5:25 PM, busterbuddy wrote:

    I believe the limit for UBIT is 10k before it becomes a problem. But I"m not sure everything said in the video is totally accurate.

    Not all the money provided in return is return of capital some of it is interest. And there is carried interest as well. For Royalty trust there is a depletion allowance.

    But having said all that I recommend for the new person to limit their purchase in MLPs to KMR and LNCO. And right now new money would go, in my opinion to LNCO because it has not run up as much as KMR.

    But I would agree that the first option for MLPS would be a taxable account. IF that is an option.

  • Report this Comment On February 10, 2013, at 4:31 PM, Sumflow wrote:

    If everyone coming in knew the ideal KM for their situation we would not continue to have this legacy of people who own the security in the wrong account trying to hold up their end.

    KMR outright, or in a Roth

    KMI in an IRA

    KMP for people who want to take the income out, but at the same time leave the principle and the earnings intact for heirs.

  • Report this Comment On February 13, 2013, at 2:14 PM, MikeHarold wrote:

    I have a bit of ETP in an after tax equity account, I got after ETP purchased SUN. I have a distribution from this MLP, but it does not show up on a 1099.

    In your video you describe it as income, but where/how do I declare?

    Thank You

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