Limited Partnerships and Self-Directed IRAs

Limited partnerships allow you to receive the entire dollar of profit. You only pay whatever income taxes are due. And if you hold them in Self-Directed IRAs or other retirement accounts, taxes are deferred, or tax-free if it’s in a Roth.

Limited partnerships, including “master limited partnerships (MLPs) which are simply limited partnerships that trade on the stock market,have long been pitched as solutions to income-hungry investors – especially in higher tax brackets.

Here’s the deal:

Limited partnerships don’t pay income taxes at the corporate level. Instead, they are ‘pass through’ entities, and therefore income, liabilities and expenses are passed through to investors, and investors account for them on their own individual income tax returns.

Why? Since dividends to shareholders are not deductible at the corporate level, every dollar you receive in dividends from a publicly traded C-corporation, in or out of a mutual fund, is already taxed. If a company makes a dollar per share, and wants to distribute it to shareholders, they first have to pay the highest corporate income tax in the world of up to 38 percent. Your IRA only receives 62 cents on the dollar of profit, once the company pays its U.S. income taxes. States may add another layer of tax on top of that. Since dividends are normally taxable to the individual (retirement accounts aside), any C corporation dividends you receive are subject to ‘double taxation,’ once at the corporate level, and once at the individual level.

Additional Tax Features of Limited Partnerships and MLPs

Because of the nature of the master limited partnership – and issues related to tax deductions and depletion allowances on things like oil and natural gas wells, distributions to shareholders consist of a mixture of ordinary income and return of capital. So only a portion of that cash flow back to investors is normally taxable as ordinary income. This makes them much more attractive to individual

That’s great news for tax-sensitive investors who hold them in taxable accounts. But what about holding them in Self-Directed IRAs?

In that case, if you hold an LP or MLP within Self-Directed IRAs or other retirement accounts, this particular tax advantage is irrelevant to you. Since everything that comes in to your IRA in distributions from a limited partnership goes into the same tax-deferred pot (it’s a tax-free pot if you use a Roth IRA), there’s no particular tax advantage to holding a limited partnership or MLP within a retirement account. But there’s no disadvantage, either.

While limited partnerships don’t have the same advantage of tax efficiency within a retirement account, you still get the benefit of avoiding the double taxation on C corporation dividends. And you still get the benefit of the intrinsic cash flows within the MLP structure.

You also receive the asset protection benefits of Self-Directed IRAs, which receive substantial protection from creditors.

Furthermore, these are income-oriented investments that aren’t directly tied to potentially rising interest rates. Unlike bonds, a rise in interest rates doesn’t necessarily hurt a portfolio of pipelines, oil wells, dams and other projects commonly funded via a limited partnership structure.

In the case of pipelines, they aren’t even correlated directly to oil prices. Indeed, a drop in oil prices can even result in increased pipeline throughput.

When it comes to investing in limited partnerships, you don’t need to let the tax tail wag the investment dog. Make the investment based on your own tolerance for risk, the risk-adjusted expectation of return, and the potential diversification benefit of your overall portfolio.

American IRA, LLC works with many investors across the country who have incorporated limited partnerships and MLPs into their investment portfolios within their Self-Directed IRAs. If you are entrepreneurially minded, or have the sophistication to review limited partnership opportunities and conduct your own due diligence, we’d like to work with you in incorporating the powerful limited partnership structure into your portfolio. Call us today at 866-7500-IRA(472), or visit our website at We look forward to working with you.