Gyroscopic Investing

With talks of new taxes hitting MLPs, it appears that this will drive down share prices, thus boosting the yield, in order to compensate investors for higher taxes. In other words, if taxes increase, then an investor will demand a higher yield to compensate for the higher tax, and the value of the shares will drop.

If you're using a Roth IRA, and keep the total annual return of distributions is below $1,000 per year, then you don't have to file taxes on your MLP income. However, if you have an IRA and hold MLPs and the "annual return" is greater than $1,000, you're on the hook for taxes even though it's in an IRA.

It seems to me that for someone who might want to drop $10k to $20k into MLPs within a Roth IRA, that you may be getting a free lunch because the market is pricing them as if held in a taxable account. This is due to the inefficiency created by artificial limitations on Roth IRA contributions.

Two issues I see:

One, MLPs are already about 60-90% tax deferred (if you reivnest distributions) thanks to tax laws and depreciation pass through. Why waste precious tax-sheltered space (especially if it is Roth space where distributions at rtirement will never be taxed) on assets that already have tax advantages.

Two, MLPs (most of them, anyway) raise their distributions quarterly or annually. If you put $10K into MLPs in an IRA or Roth IRA and it starts out yielding 5% ($500 since you put in $10K), distribution increases (and greater distribution amounts due to reinvested previous distributions buying more units) will put you over the $1K limit in a hurry. UBTI is taxed at trust rates so the 35% (soon to be 39.6%) bracket hits MUCH sooner....IIRc the top bracket for UBTI kicks in at several tens of thousands of dollars, no several hundreds of thousands. The other brackets hit at vastly lower levels at well. If you reinvest and distributions rise at say 5% per year you'll be paying 35% of your MLP distributions in taxes before you know it. That defeats the whole point of a Roth.