Taxable Income in Retirement Accounts? Meet Master Limited Partnerships

An investor purchasing a master limited partnership (“MLP”) in a retirement account, such as an IRA or Roth IRA, possibly opens oneself up to immediate tax exposure.

Generally, MLPs are exchange-traded investments that are focused on exploration, development, mining, processing, or transportation of minerals or natural resources. MLPs hold cash-generating assets such as oil and gas properties or pipelines. Because the shares of an MLP represent an interest in the partnership, any income produced is considered a partnership distribution and is taxable. Companies issuing MLP shares do not pay corporate income tax but instead, distribute income to its partners or unitholders. These distributions to the shareholders are considered taxable income by the IRS.

When an MLP is held within a retirement account, any income distribution of $1,000 or more is classified by the IRS as unrelated business taxable income (“UBTI”) and is subject to immediate taxation, unlike most other investments in a retirement account, where earnings are usually tax-deferred or, in the case of Roth IRAs, tax-free.

Financial advisors are fiduciaries and are obligated to recommend appropriate securities and strategies for investors. Failing to recommend purchasing an MLP in a taxable account may expose advisors to liability.

If your advisor housed MLPs in your retirement account, you might have legal recourse. Please call David Harrison, Esq. at (310) 499-4732 for a free consultation. Mr. Harrison, a former NYC assistant district attorney, and in-house Morgan Stanley attorney has been in private practice representing defrauded investors for the last 20 years.


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