What are the pros and cons of investing in Master Limited ...

My wife and I are both in our early 70s. We are retired and drawing Social Security, which we live on comfortably. We are thinking of investing in a utility pipeline MLP (Master Limited Partnership) for our 2012 Roth IRA Contribution. What are the pros and cons? -- Name withheld, Boulder City, Nevada

Master Limited Partnerships run like limited partnerships?that is, businesses conducted by two or more lead partners, with several other partners acting as investors. But the investment units trade on an exchange the way stocks do. The partnership structure allows the entity?which must earn 90% of its revenue in natural resources, commodities or real estate?to pass on its tax liabilities and deductible expenses to all investors. Besides being able to appreciate in value, MLP investments pay out distributions, similar to dividend-paying stocks. Because of the partnership structure, a portion of the distributions is not taxed when the investment is held in taxable accounts. But the cost basis is subsequently reduced?which means more money subject to capital gains taxes when you sell.

MLPs are not appropriate for 401ks and IRAs because within these accounts the income can be considered "unrelated business taxable income," and can be subject to taxes at corporate rates, says financial adviser Matt Ballew of Jackson, Miss. What's more while those who invest in MLPs in taxable accounts may write off partnership expenses against tax liabilities on their tax returns, this isn't allowed if the MLP is held in a retirement account. If you want to invest directly in MLPs, best to hold them in a brokerage account, though you may still want to consult a tax professional before you buy to make sure you understand all the consequences.

-- Walecia Konrad

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Source: http://helpdesk.blogs.money.cnn.com/2012/01/10/what-are-the-pros-and-cons-of-investing-in-master-limited-partnerships/

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