Can I hold MLPs in my IRA? This is a common question from investors considering buying MLPs for income.
While you are allowed to hold MLPs in a tax-advantaged account like an IRA, it is unwise.
That’s because the IRS considers MLP distributions paid into an IRA “unrelated business taxable income,” or UBTI. And if your IRA earns over $1,000 in UBTI (total from all sources, including distributions from different MLPs) in a single year, your IRA will be liable for paying tax on that income, at corporate tax rates.
However, if you do most of your investing through an IRA and would like to add the yield-boosting powers of MLPs to your account, there is a way.
Funds that specialize in MLPs have given investors a way to benefit from the income-generating power of MLPs without dealing with K-1 forms and UBTI liability. And there are quite a few to choose from.
In fact, an MLP-focused closed-end fund was just recommended in the latestDividend Digest. This fund currently yields 5.6%, and is a great way to add MLP-style high yields to any account. Here’s the recommendation, from the Forbes/ISA Closed End Fund and ETF Report:
“We looked for ways to participate in the natural gas sector, and in addition to ETFs that invest in the sector, we found a dividend-paying closed end fund that trades at a discount. ClearBridge Energy MLP Total Return Fund (CTR)currently trades at a price of $21.40 and has a distribution yield of 6.17%. Its net asset value of $21.49 gives the fund a discount of -0.28%. The 52-week average discount for the fund is actually a premium of 2.01%. The fund invests in energy master limited partnerships that are engaged in the business of exploring, developing, producing, gathering, transporting, processing, storing, refining, distributing, mining or marketing natural gas, natural gas liquids, crude oil, refined petroleum products or coal. Its largest investment is in the Gathering/Processing of natural gas at 34.7%, followed by Diversified Energy Infrastructure at 29.3% and Liquids Transportation & Storage at 18.1%. It is leveraged at 25.93% and has a low expense ratio of only 0.76%. It pays quarterly dividends.”—Jack Colombo,Forbes/ISA Closed End Fund and ETF Report, April 2013
