Retirees Can Shield $29,070 of Dividend Income in Roth Accounts

Q: Could sheltering your favorite high-yield MLP inside a Roth account secretly trigger an unexpected and costly tax nightmare?

Yes. A high-yield MLP inside a Roth can trigger an unexpected tax bill if it produces too much unrelated business taxable income, or UBTI. That is the catch behind the otherwise sound idea of putting tax-inefficient income assets in a Roth. The article’s logic works well for many ordinary-income payers such as BDCs like Ares Capital, whose distributions can create heavy annual tax drag in a taxable account. But MLPs such as MPLX are different. They issue Schedule K-1s, and their partnership income can flow into an IRA or Roth as UBTI. If UBTI for that account exceeds $1,000 in a year, the custodian may have to file Form 990-T and pay tax from the account itself. That means the Roth is not always a clean shelter for an MLP. The danger is not that every MLP distribution is immediately taxed inside the Roth. In fact, much of an MLP’s cash payout is often treated as return of capital in taxable accounts. The problem is that retirement accounts are subject to separate UBTI rules, and investors often miss that distinction. The result can be costly and cumbersome: account-level tax, extra paperwork, possible custodian fees, and reduced compounding. Large positions, multiple MLPs, or a sale that generates taxable partnership income can make the risk more significant. So the tax nightmare is real, but not automatic. A Roth can still be beneficial for many high-yield holdings; an individual MLP is the exception that demands a tax preparer’s review before moving it.

3 articles · Updated · 24/7 Wall St. · Aug 26

$400,000 split across Ares Capital, MPLX, Altria and Verizon would generate about $29,070 a year, and placing those holdings in a Roth would keep the full amount from federal taxes.
At a 24% bracket, the same portfolio in a taxable account would send roughly $6,977 to the IRS; at 37%, the annual tax drag rises to about $10,756.
Ares Capital's 9.71% yield and MPLX's 7.35% yield are the highest-priority Roth candidates because their payouts are generally taxed as ordinary income rather than at qualified-dividend rates.
MPLX carries an added IRA complication: its MLP structure issues a K-1 and can trigger unrelated business taxable income above $1,000, making a UBTI check important before moving units.
The report says retirees should calculate the annual tax leak before filing and weigh phased Roth conversions, since reinvesting a $6,977 yearly tax saving at 5% compounds materially over 20 years.