A Master Limited Partnership (MLP) is a type of investment—usually in the energy industry—that works like a stock but gives you high income and tax advantages.
- You invest in a pipeline or energy company (like oil or gas transportation).
- They pay you regular cash distributions (like dividends), often 6–9% per year.
- Most of that income is tax-deferred, meaning you don’t pay taxes on it right away.
- You get steady income.
- You avoid taxes on most of that income for years, until you get back what you originally invested.
- Ideal for people looking for cash flow in retirement or tax-smart investing.
This example involves investing $500,000 in Master Limited Partnerships (MLPs) to generate high, mostly tax-deferred income, and later using charitable giving to continue receiving tax benefits once the investment has paid back its original value.
Step 1: Earning 8% Tax-Deferred Income as an example
Investing $500,000 in MLPs paying 8% annually provides $40,000 per year in income. Most of this is considered a return of capital, which means you don’t pay income tax on it immediately.
Step 2: Tax Impact in Your Bracket
Assuming you’re in the 24% federal and 9.6% California income tax brackets, normally you’d owe $13,440/year in taxes on $40,000 of income. With MLPs, this income is mostly tax-deferred for over 12 years.
Chart: Estimated $13,440/year in tax savings through tax deferral.
Step 3: When Principal is Repaid
After about 12.5 years, you’ve received your $500,000 back through the annual dividends. Future income is now taxable unless you take further action.
Step 4: Charitable Giving for Continued Tax Savings
Once MLP income becomes taxable, you can donate $50,000/year in dividends or shares to charity. This avoids taxes and earns you a deduction worth $16,800/year at your combined tax rates.
Summary of Benefits
| Strategy Step | Benefit |
| Invest $500K in MLPs paying 8% | $40K/year mostly tax-deferred for 12+ years |
| Tax deferral | No federal or CA tax until capital is repaid |
| Post-tax phase | Donate income or shares to charity |
| Charitable donations | Avoid tax + receive $16.8K/year deduction |
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