Is it good to have MLP in an IRA?

Should You Hold MLPs in an IRA?

Master Limited Partnerships (MLPs) are popular among income-seeking investors for their high yields and tax advantages. But when it comes to retirement accounts like IRAs, the answer isn’t so straightforward. While it might seem logical to place high-income assets in a tax-deferred account, MLPs are an exception.

Here’s why: MLPs already provide tax benefits by distributing income that’s often tax-deferred at the individual level because of depreciation and other deductions. When held in an IRA—where investment gains are already tax-deferred—this advantage becomes redundant. In other words, you’re not gaining much, if anything, from stacking tax deferrals.

The bigger issue, however, is the potential tax liability. MLPs generate what’s known as Unrelated Business Taxable Income (UBTI). While this usually isn’t a problem in a regular brokerage account, the IRS requires retirement accounts to pay taxes on UBTI if it exceeds $1,000 in a year. Since MLPs are structured as partnerships, they frequently trigger UBTI, which could unexpectedly create a tax bill for your IRA.

That means the IRA itself—not you personally, but the account—could owe taxes to the IRS. Few investors expect their retirement accounts to generate a tax bill, making this a particularly unpleasant surprise.

For most people, it’s wiser to hold MLPs in taxable accounts, where the tax benefits can be fully realized, and UBTI won’t trigger account-level taxes. If you're determined to include MLPs in your retirement portfolio, consult a tax advisor to understand the risks and paperwork involved.

In short, while MLPs can be strong income generators, their complex tax structure makes them a poor fit for IRAs. The potential drawbacks usually outweigh the benefits. A strategic approach means placing the right investments in the right accounts—and for MLPs, that’s typically outside of retirement accounts.