Financial

4 Ways to Invest in MLPs

There are multiple ways to invest in MLPs, and each method has different ramifications. There’s no single best way to invest in an MLP; the investor’s goals and other traits can steer them toward the best assets and vehicles. Below are several ways to invest in MLPs.

Individual Units

According to information from the National Association of Publicly Traded Partnerships, there are more than 100 energy MLPs that have a total market value of over $400 billion. Those who directly own MLPs receive a K-1 each year; if they hire a tax preparer, they may pay $200 or more each year in fees. This amount could greatly increase if the MLP units are sold, because the owner may have to file in more than one state.

I-Units

When investors opt out of current income, they can gain substantial tax benefits. Instead of paying out in cash, I-Units distributed additional shares. These shares aren’t taxed until they’re sold, and those held for more than a year are eligible for long term gain designation. When an owner sells shares, they receive a 1099 form.

Taxation as a C-Corp

When an MLP generates net income, it is taxed as a corporation at a rate of up to 35%. Thusly, investors’ distributions have already been subjected to corporate taxes, and the investor is taxed again when they receive the distribution. However, MLPs have no unrelated taxable income, which means they can be included in a retirement account.

ETNs

Exchange traded notes or ETNs are debt instruments issued by sponsors. An ETN investor may have two concerns: the issuer’s creditworthiness and tax inefficiency. Because ETNs are debt instruments, payouts are taxed as ordinary income, at a rate of up to 43.4%. These ETNs provide 1099s and they can be included in retirement accounts. Unlike other types of MLP ownership, the sponsor’s credit risk is a top concern. Moreover, these ETNs are regarded as expensive to purchase or sell.

MLP investors face different tax considerations that depend on the type of investment vehicle they use. Some types of ownership are relatively tax-efficient, while others are not. In most cases, the longer an MLP is held, the more tax benefits the holder receives. Those considering investing in MLPs can learn more online.