Mad Money

Tax-Free Money for Your 401(k)

Cash Alternative: Permian Basin

With the Federal Reserve cutting rates, Cramer said, cash as an investment is getting killed. That’s why he focused Wednesday’s Mad Money on high-yielding stocks. They offer better returns for investors wanting income.

Cramer already talked up Consolidated Edison for its 5.7% payout. Plus, utilities in general are safer stocks to own during a recession, which is exactly what we’re in right now, the Mad Money host said. But it turns out U.S. energy trusts might be an even better place for your money and, more specifically, your 401(k).

U.S. energy trusts own oil and gas wells but usually let other companies run them. The trusts are exempt from paying taxes so long as the companies return a good chunk of the profits to shareholders through dividends. Now, the dividends are not exempt from being taxed. That is, unless the energy-trust stocks are held in a 401(k) or IRA. In fact, the money earned from the dividends, provided you reinvest them, collects and compounds tax-free in these accounts until it’s withdrawn during retirement. Only then would your profits be taxed.

So which are the best U.S. Energy Trusts to own? As great as San Juan Basin Royalty and Hugoton Royalty Trusts’ over 7% yields are, those of Permian Basin and BP Prudhoe Bay are in the double digits: 12.2% and 13.9%, respectively. And of the two, Cramer said he’s partial to Permian Basin. Permian’s more diversified, it operates in Texas rather than tax-heavy Alaska, and the shorter reserve life reduces uncertainty about the trust’s potential.

Even if oil drops to $70 to $80 a barrel – and Cramer has said he thinks it’s going to $125 – PBT historically has still yielded between 8.1% and 9.3% at those levels. That’s far from shabby.

So if these past eight months of turmoil scared you and your retirement funds out of the market, maybe Premian Basin and its yield will nudge you back in. After all, nothing beats near tax-free money.

Watch the video for even more info on these U.S. energy trusts.

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