Navigating Oil Investments: Strategies For Your 401(K)

A 401(k) is an employer-sponsored retirement savings plan that many companies offer as a valuable benefit. Your plan may have stocks, bonds, mutual funds, CDs, money market funds or cash, and may earn royalties on oil production as well. However, the taxation of such income makes it a dubious investment for a retirement plan. There are several ways to invest in energy and oil drilling, including buying the right to a stream of income (royalties) from producing oil fields.

Oil Royalties - buy the right to a stream of income from oil fields

There are several ways to invest in energy and oil drilling through your 401(k). One of the most popular is to buy the right to a stream of income (royalties) from producing oil fields. This can be done with shares in a master limited partnership, which distributes its income and distributable cash flow to shareholders each year. The MLP itself enjoys a tax exemption on this income, while investors can defer taxes on the distributable cash flow until they sell their shares.

A direct stream of oil royalties may be taxable, even in a 401(k). A 401(k) is an employer-sponsored retirement savings plan. Many companies offer 401(k)s as a valuable benefit, and match contributions to the plan by employees. The Internal Revenue Service sets the rules on 401(k)s and the types of investments they can hold. Your plan may have stocks, bonds, mutual funds, CDs, money market funds or cash, and may earn royalties on oil production as well. But the taxation of such income makes it a dubious investment for a retirement plan. A 401(k) account enjoys favorable tax treatment, as does an individual retirement account.

There are other ways to get oil royalty income into your 401(k). "I-Shares" mirror the structure of master limited partnerships but pay their dividends in stock, rather than cash, and they are not subject to the UBTI tax rules. In addition, exchange-traded notes and exchange-traded funds that derive their income from energy companies can be held in a 401(k). But the IRS taxes the income of companies held by ETNs and ETFs, as well as the dividends you receive as an investor, if you have a traditional 401(k). For that reason, the return may not match that of an MLP.

Once you know what you own, go to fossilfreefunds.org, a website run by As You Sow. The site lets you search any fund in your 401(k) plan by name, and gives each a letter grade based on stakes it has in carbon reserves, pipelines, oil and gas companies, and other parts of the fossil fuel industry.

While countries around the world get more serious about transitioning away from fossil fuels, investments in oil and coal may tank even further. “To avoid fossil fuels is good for your portfolio. Environmental considerations get put in the tree-hugging liberal box, but they are factors that reduce risk and increase return”, said R. Paul Herman, CEO of HIP Investor, an advisory firm that looks at impacts on society. For both altruistic and self-interested reasons, the time is ripe to dump your dirty portfolio. Many employers, large and small, use the online benefits management platforms of their 401(k) providers that let employees easily check the status of their retirement funds.

Master Limited Partnerships - shares in a partnership that distributes income to shareholders

Master Limited Partnerships (MLPs) are a way to invest in energy and oil drilling through shares in a partnership that distributes income to shareholders. The MLP itself enjoys a tax exemption on its income, while investors can defer taxes on the distributable cash flow until they sell their shares.

One of the most popular ways to invest in energy and oil drilling is to buy the right to a stream of income (royalties) from producing oil fields. This can be done with shares in a master limited partnership.

There are other ways to get oil royalty income into your 401(k). I-Shares mirror the structure of master limited partnerships but pay their dividends in stock, rather than cash, and they are not subject to the UBTI tax rules. In addition, exchange-traded notes and exchange-traded funds that derive their income from energy companies can be held in a 401(k).

However, the IRS wants to discourage savers from operating partnerships or businesses through their accounts. The Internal Revenue Service sets the rules on 401(k)s and the types of investments they can hold. Your plan may have stocks, bonds, mutual funds, CDs, money market funds or cash, and may earn royalties on oil production as well. But the taxation of such income makes it a dubious investment for a retirement plan.

There are other ways to invest in energy and oil drilling, such as buying the right to a stream of income (royalties) from producing oil fields. This can be done with shares in a master limited partnership.

Exchange-Traded Funds - hold energy company notes in a 401(k) account

There are several ways to invest in energy and oil drilling. One of the most popular is to buy the right to a stream of income (“royalties”) from producing oil fields. This can be done with shares in a master limited partnership (MLP). The MLP itself enjoys a tax exemption on this income, while investors can defer taxes on the distributable cash flow until they sell their shares.

Unfortunately for retirement savers interested in MLPs, the IRS wants to discourage savers from operating partnerships or businesses through their accounts. A direct stream of oil royalties may be taxable, even in a 401(k). A 401(k) is an employer-sponsored retirement savings plan. Many companies offer 401(k)s as a valuable benefit, and match contributions to the plan by employees. The Internal Revenue Service sets the rules on 401(k)s and the types of investments they can hold. Your plan may have stocks, bonds, mutual funds, CDs, money market funds or cash, and may earn royalties on oil production as well. But the taxation of such income makes it a dubious investment for a retirement plan.

A 401(k) account enjoys favorable tax treatment, as does an individual retirement account. There are other ways to get oil royalty income into your 401(k). I-Shares mirror the structure of master limited partnerships but pay their dividends in stock, rather than cash, and they are not subject to the UBTI tax rules. In addition, exchange-traded notes and exchange-traded funds that derive their income from energy companies can be held in a 401(k). But the IRS taxes the income of companies held by ETNs and ETFs, as well as the dividends you receive as an investor, if you have a traditional 401(k). For that reason, the return may not match that of an MLP.

Once you know what you own, go to fossilfreefunds.org, a website run by As You Sow. The site lets you search any fund in your 401(k) plan by name, and gives each a letter grade based on stakes it has in carbon reserves, pipelines, oil and gas companies, and other parts of the fossil fuel industry. While countries around the world get more serious about transitioning away from fossil fuels, investments in oil and coal may tank even further.

Divest Fossil Fuels - reduce risk and increase return by dumping oil investments

Divesting fossil fuels from your 401(k) can reduce risk and increase return. Environmental considerations are factors that reduce risk and increase return. Once you know what you own, go to fossilfreefunds.org, a website run by As You Sow. The site lets you search any fund in your 401(k) plan by name, and gives each a letter grade based on stakes it has in carbon reserves, pipelines, oil and gas companies, and other parts of the fossil fuel industry.

Many employers, large and small, use the online benefits management platforms of their 401(k) providers that let employees easily check the status of their retirement funds. There are several ways to invest in energy and oil drilling. One of the most popular is to buy the right to a stream of income ("royalties") from producing oil fields. This can be done with shares in a master limited partnership, which distributes its income and distributable cash flow to shareholders each year. The MLP itself enjoys a tax exemption on this income, while investors can defer taxes on the distributable cash flow until they sell their shares.

Unfortunately for retirement savers interested in MLPs, the IRS wants to discourage savers from operating partnerships or businesses through their accounts. A direct stream of oil royalties may be taxable, even in a 401(k). A 401(k) is an employer-sponsored retirement savings plan. Many companies offer 401(k)s as a valuable benefit, and match contributions to the plan by employees. The Internal Revenue Service sets the rules on 401(k)s and the types of investments they can hold. Your plan may have stocks, bonds, mutual funds, CDs, money market funds or cash, and may earn royalties on oil production as well. But the taxation of such income makes it a dubious investment for a retirement plan.

There are other ways to get oil royalty income into your 401(k). "I-Shares" mirror the structure of master limited partnerships but pay their dividends in stock, rather than cash, and they are not subject to the UBTI tax rules. In addition, exchange-traded notes and exchange-traded funds that derive their income from energy companies can be held in a 401(k). But the IRS taxes the income of companies held by ETNs and ETFs, as well as the dividends you receive as an investor, if you have a traditional 401(k). For that reason, the return may not match that of an MLP.

While countries around the world get more serious about transitioning away from fossil fuels, investments in oil and coal may tank even further. “To avoid fossil fuels is good for your portfolio. Environmental considerations get put in the tree-hugging liberal box, but they are factors that reduce risk and increase return”, said R. Paul Herman, CEO of HIP Investor, an advisory firm that looks at impacts on society. For both altruistic and self-interested reasons, the time is ripe to dump your dirty portfolio.

Taxation - direct oil royalties may be taxable in a 401(k) account

A 401(k) is an employer-sponsored retirement savings plan. Many companies offer 401(k)s as a valuable benefit, and match contributions to the plan by employees. The Internal Revenue Service sets the rules on 401(k)s and the types of investments they can hold. Your plan may have stocks, bonds, mutual funds, CDs, money market funds or cash, and may earn royalties on oil production as well. But the taxation of such income makes it a dubious investment for a retirement plan. A 401(k) account enjoys favorable tax treatment, as does an individual retirement account.

A direct stream of oil royalties may be taxable, even in a 401(k). One of the most popular ways to invest in energy and oil drilling is to buy the right to a stream of income ("royalties") from producing oil fields. This can be done with shares in a master limited partnership, which distributes its income and distributable cash flow to shareholders each year. The MLP itself enjoys a tax exemption on this income, while investors can defer taxes on the distributable cash flow until they sell their shares. Unfortunately for retirement savers interested in MLPs, the IRS wants to discourage savers from operating partnerships or businesses through their accounts.

There are other ways to get oil royalty income into your 401(k). "I-Shares" mirror the structure of master limited partnerships but pay their dividends in stock, rather than cash, and they are not subject to the UBTI tax rules. In addition, exchange-traded notes and exchange-traded funds that derive their income from energy companies can be held in a 401(k). But the IRS taxes the income of companies held by ETNs and ETFs, as well as the dividends you receive as an investor, if you have a traditional 401(k). For that reason, the return may not match that of an MLP.

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