This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Cramer on Retirement: Can Master Limited Partnerships Hurt Your IRA?

Stocks in this article: KMPEPDMWEETP

Consider this. Partnerships held in a retirement account can get caught in an arcane tax rule called unrelated business taxable income. You pay this when cash distributions from an investment are considered unrelated to the structure that gives an entity its tax-exempt status.

In plain English: Income from oil and gas is unrelated to saving for retirement, so the IRS wants you to pay some taxes on it.

This usually affects only investors with big stakes in MLPs, but it can rear its ugly head if you have a particularly successful hit.

Some analysts believe that UBTI is no big deal in a retirement account because it's actually the custodian's responsibility to file these taxes, not the individual's.

"Technically, that's true, says Lyman. "But what we hear from investors is that many times their custodians don't really have a clue what to do."

And, even if they do, it's likely they'll charge a fee for these services, says Mark Willoughby, principal at Boston-based Modera Wealth Management.

One more tax angle to keep in mind no matter where you park an MLP: If the partnership operates across state lines you may have to file taxes in each of those states, a cumbersome and sometimes costly process.

Bottom line: If you invest directly in MLPs, it's best to hold them in a brokerage account and take full advantage of the tax breaks and high yields.

Out of the 90-plus publicly traded MLPs, those worth considering include Kinder Morgan Energy Partners (KMP), Enterprise Product Partners (EPD), MarkWest Energy Partners (MWE) and Energy Transfer Partners (ETP). (The latter is held in the Action Alert PLUS portfolio. We like the partnership's large portfolio and increasing shift toward natural gas, not to mention the 7.6% yield.)

For diversity's sake, some advisers suggest investing in exchange-traded funds and open and closed mutual funds that focus on MLPs.

Shareholders in these accounts are not subject to UBTI taxes so they can easily put the funds in retirement accounts.

The rub: extremely high fees. Because the fund companies are not considered "pass through" entities, they pay corporate taxes on MLP earnings. To do that, they charge high fees. Plus, total returns are often lower than you might get from individual MLPs.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,399.67 +19.26 0.12%
S&P 500 1,904.01 +17.25 0.91%
NASDAQ 4,316.0740 +57.6360 1.35%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs