Some financial planners are using master limited partnerships, or MLPs, to diversify retirees' portfolios, provide dividend income and try to hedge against inflation. No free lunch though. There are risks involved.
MLPs are typically limited partnerships that are publicly traded on a U.S. securities exchange. (I wouldn't touch the non-publicly traded ones.) Standard & Poor's has a report you can read explaining the market for them. You can read it online at www2.standardandpoors.com/spf/pdf/index/MLP_Primer_Nov2008.pdf.
Many MLPs are in the pipeline business. In essence, you get paid for the volume going through the pipe, so the cost of the gas doesn't affect you. Others have commodity price risk embedded in their models. I'd stay away from those.
The attraction to MPLs are their high yields. You can still find MLPs with yields of 8% or so. During the downturn these yields got REALLY rich.
When held in taxable accounts, MLPs provide some attractive tax advantages. Because of its structure, an MLP gets to pass its depreciation of assets and expenses through to investors, who may be able to use the pass-through expenses to reduce or eliminate the tax on the income received from that particular investment.
But you would lose that tax advantage by holding MLPs in a tax-deferred individual retirement account, and you have to pay ordinary income tax on any distributions you eventually take.
And if an MLP investment generates what is known as "unrelated business taxable income," which is likely, the IRA has to file a separate tax return and pay any tax involved from assets in the account.
How to fix this? First, you may want to consider converting your traditional IRA to a Roth so that you don't have to pay income tax on future earnings (subject to Roth holding rules). However, your account could still be subject to unrelated-business income tax.
Or you could make future investments in "closed-end" funds that invest in a number of publicly traded MLPs. Such funds aren't subject to the unrelated-business income tax, but still could benefit from potential returns. However, the returns from these funds tend to be slightly less as they absorb all the tax consequences.
All in all, an intriguing avenue for yield hungry investors. See your advisor for details.
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