As the national debt passed $36 trillion this month, we all need to, as unpleasant as the task is, remind ourselves that taxes are relatively low and one day soon we’ll all have to pay for the many obligations of the Federal government and its over-reaches. For those baby boomers who were sold the concept of the 401(k) in 1978 with The Revenue Act, the bill is coming due. For decades the Federal government gave you a stay of execution and very much encouraged you to defer your retirement monies, through legislation promoting employer matching funds and other incentives. But tucked neatly into all the legislation is also the second most accursed 3 letter-combination (we all know the first, “IRS”). And that 3-letter combination is RMD, which stands for Required Minimum Distribution, where the government forces you to take out a certain percentage of your tax-deferred accounts, whether they be 401(k), 403(b), 457(b), IRA, SEP IRA or SIMPLE IRA. This is a long agricultural game they’ve played as they’ve counted on a cooperative public to feed and water those accounts for short-term benefits by deferring taxes on the seed, so they can reap the huge benefits of taxing the harvest. If your biggest accounts are tax-deferred then the government has you exactly where they have wanted you for decades. At RMD age (73 for those approaching, 75 for younger), the government gets to tell you how much to take out of your account and then how much they’re going to tax you on it. If our country’s obligations are putting heavy strains on the budget when it’s time for your RMDs, then you look just like a nice ripe apple to be plucked from the tree.
We’re in many active conversations with our clients about Roth Conversions and have executed many in 2024. This can help offset the impact of those RMDs on your taxable income. Taxes are a known quantity until the expiration of the Tax Cuts and Jobs Act at the end of 2025. After that, all bets are off the table. If you haven’t had a Roth Conversion conversation with us, now is the time. We’re running out of days in 2024, so call us now for that last-minute discussion. Roth Conversions are about taking your power back, plain and simple. Would you rather laugh at the news or cry? The more you have in your Roth accounts, the more you can do the former.
From an investment standpoint, we’ve noticed an opportunity for tax-free income. For those of you feeling the tax brunt of RMDs that are already out of your control and pension plans that serve you well but also serve to bump you up a tax bracket, please read the following: Municipal bonds and municipal bond ETFs are starting to look good in terms of what we call “tax-equivalent yield”. It all depends on your tax bracket. For those of you who are in the 22% bracket and up, it’s go-time for munis. The tax-equivalent yield right now is about even. Right now, municipals are paying out nearly the same as the after-tax yield for that 22% bracket. But … the yield on the munis doesn’t necessarily have to be higher at this moment than the after-tax yield on a corporate bond from a planning standpoint, as we project our tax rates are likely to go up, and if you are already in municipals then you are likely better positioned for tax-free income for the long haul.
With this in mind, our investment committee has “juiced up” the potential yield in our Tax-Efficient ETF Strategy to deliver more after-tax punch to your table. (Anyone thirsty, yet?) With oil demand collapsing as OPEC just announcing its 5th-straight monthly downward revision to its oil demand outlook1, inflation is unlikely to re-emerge without some other catalyst. As oil’s collateral effects on many different categories in the CPI readings loom large, we’re advocating our clients in the 22% bracket and up to go ahead and pursue our Tax-Efficient Strategy for more tax-free income. (Keep in mind that while all municipal bond ETFs are federal tax free, they are not necessarily state tax-free). Pensions and RMDs are near immovable objects once they kick in, but your investments are not. Call us to make your portfolio “Tax Smart.” Uncle Sam may have already made a grab for your pensions and RMDs, but when he casts that greedy eye upon your investments, you can say, “I’m sorry, but there’s no juice left in that squeeze.”
Sincerely,
The WTA Investment Committee
Source:
1@TheKobeissiLetter, 12/11/2024
