REITS/MLPs -- Taxable Account or Roth IRA

[stewardinlife]

Hello all,

I am relatively new in the DGI. But have invested 10K so far since May of this year. I do have a question on where to have REITS and MLPs -- whether in a regular brokerage account or a ROTH IRA account?


Based on my research and readings many are recommending putting these in a ROTH IRA as otherwise the taxes are huge. I am in the 25% regular bracket (so I understand that qualified dividends will be taxed 15% for regular stocks).

Also, if ROTH IRA is the vehicle to put these, I am limited to only $5,500 per year though, right?

Thanks.
Paul

[hendi_alex]

MLP's can generate tax issues when held in an IRA. Look up UBTI as relates to MLP's and IRA's. Best to hold MLP's in a taxable account to reap the full advantage of the MLP structucture anyway. An ETF or CEF may be more appropriate for holding MLP's in IRA's. IMO REITS and other investments which pay nonqualified dividends are best held in IRA's.

[stewardinlife]

(09-03-2015, 08:41 PM)hendi_alex Wrote: MLP's can generate tax issues when held in an IRA. Look up UBTI as relates to MLP's and IRA's. Best to hold MLP's in a taxable account to reap the full advantage of the MLP structucture anyway. An ETF or CEF may be more appropriate for holding MLP's in IRA's. IMO REITS and other investments which pay nonqualified dividends are best held in IRA's.

Thanks Alex. So as I understand, MLPs are good in a taxable brokerage. And REITs in a Roth are good.

[EricL]

(09-03-2015, 09:06 PM)stewardinlife Wrote: Thanks Alex. So as I understand, MLPs are good in a taxable brokerage. And REITs in a Roth are good.

That is how I understand it as well. MLP best in taxable account and REITs best in a tax advantaged IRA.

[rayray]

UBIT

Unrelated

Business

Income

Tax

This acronym is a tax from the IRS concerning MLP's and it scares a lot of people away from holding such investments from IRA's.

See more:

http://www.irs.gov/publications/p598/ch04.html


I personally don't own any MLP's in my ROTH but would not rule out the possibility of owning a MLP in a Roth. Not all MLP's generate UBIT's, some companies generate negative UBIT's that would offset your total UBIT, if any. Others have UBIT but not on a regular cycle. So, in essence it depends on the MLP. I believe under current tax rules as long as your total MLP UBIT is less then 1000 you don't have to worry about paying taxes form your IRA. Check out the UBIT EXEMPTIONS in the above link I provided. I can probably invest my whole ROTH IRA in a MLP and not worry about crossing that 1000 dollar barrier.

https://www.trustetc.com/self-directed-ira/rules/ubit

https://www.trustetc.com/990t/faq

Q. If an investment creates a taxable event, why include it in the IRA?
A. There are several reasons investors choose to put IRA dollars into an investment that will trigger a UBIT event. First, if the return on that investment, even with the taxes, will produce a higher return than a non-taxable investment. Second, many investors have large balances within retirement accounts due to company matches and a long term investment strategy. If the taxes due or penalties for early withdrawal apply, placing funds in an investment within a retirement account that triggers UBIT may be worth the taxes owed. Third, is to evaluate re-investment opportunities. For investments made outside of an IRA or other tax-exempt account, each investment must pay taxes over and over again on all gains. Within the IRA you have the choice of re-investing gains in non- taxable instruments, keeping the UBIT to a minimum.



REITS are more clear cut and better investments in a tax-deferred account because the investment is tax free. If a REIT is held in a taxable brokerage account the distributions are taxed at a much higher rate then qualified dividends or long term capital gains, REITS are taxed as ordinary income.

[stewardinlife]

Thanks guys. Very helpful.

Also, if I am going to go with ROth IRA for REITs, I am being limited on the annual amount I can put there -- $5500 per year.

I do have a 403 b but do not have choice of choosing individual stocks.