According to Bankrate.com, 57 percent of Americans don’t have a will.
Pardon me, but having a will and creating a simple trust is essential to preserving one’s legacy.
(This should not be an “aha” moment — but if it is, do yourself and your heirs a favor and make a will already.)
Recently at The Broadmoor, Certified Financial Planner June Walbert, with USAA in San Antonio, gave two presentations — about long-term care insurance, building a retirement paycheck, tax diversification and preserving your legacy.
When yours truly caught up with Walbert for lunch at The Tavern (try the grilled salmon over Caesar salad, it’s fabulous, darling), we spoke about municipal bonds and Roth Individual Retirement Account conversions.
“I don’t even have to have a crystal ball to predict that taxes will go up,” Walbert said. “We just don’t know how much and when.”
Thus, municipal bonds are a “great investment in an unfriendly tax environment.”
And right now, the spread between Treasury bills and municipal bonds is “3 percentage points — when you consider the taxable equivalent yield (for a 35 percent tax bracket),” she said.
“So, people buy bonds for the milk, not the cow,” she said, laughing at herself for using such a phrase.
When interest rates rise, bond prices typically fall, so investors need to be ready for volatility in bond prices by remembering that they buy bonds for the yield (the income aspect, aka the “milk”), not for the capital appreciation — because it’s the taxable equivalent yield that matters.
Now for the don’t-try-this-until-you-read-this caveat or two.
Muni bonds are best for folks in at least a 28 percent marginal tax bracket — for investors in a lower tax bracket, it “makes more sense to stick with Treasuries and corporate bonds.”
And munis are only for the “taxable portion” of one’s portfolio. If investors in a higher tax bracket have a 50/50 allocation of stocks and bonds in their portfolio, then half of the bond allocation of the portfolio could be in municipal bonds.
The other half of the bond allocation should be in Treasuries, corporate bonds and, perhaps, “a small slice of high-yield bonds.”
“Just as you diversify with stocks, you need to diversify with bonds,” Walbert said.
Now for Roth IRA conversions.
“There are two compelling reasons to convert to a Roth, now or in the future,” Walbert said — to create a tax-free income stream for retirement, and/or to create a tax-free legacy for your heirs.
And there are two reasons why today, or very soon, is an optimal time to convert: “depressed account values” (a lovely euphemism for — your retirement account has been decimated by the recession, so you’ll pay less tax), and “historically low tax rates.”
For instance, during 1913, the marginal tax rate was 7 percent. Toward the end of World War II, the rate jumped precipitously to 94 percent, due to war reparations and social programs (not dissimilar to the nation’s current situation).
By 1980, the rate had lowered to 70 percent, and by 1990, it dropped to 28 percent. This year, it’s 35 percent. In other words, it can go (and has gone) much higher.
The marginal tax rate (the percent at which each dollar above a certain threshold is taxed) is not to be confused with the average tax rate (total tax as a percentage of total income earned).
“If you’re retiring soon and will need all that money for retirement,” Walbert said, “then conversion to a Roth is probably not right for you. But if you don’t need the money for 10 or more years — or you’ll never need the money and want to pass it along to your heirs, then you or your heirs could enjoy that money in the same tax-free environment.”
And, there is no minimum required distribution with a Roth IRA, as there is with a traditional IRA. But don’t try this alone — consult with a qualified financial or tax professional.
“The key beauty of having a Roth IRA is in having some control over your taxes in retirement,” Walbert said, whereas, pensions are subject to ordinary income tax, and realized gains from joint or brokerage accounts are subject to capital gains tax.
And both of these taxes, as mentioned before, are apt to go up.
“It’s a good idea to fold a Roth account into your mix of investments,” Walbert said.
That way, you won’t be shocked or dismayed when taxes increase, much like some dear readers were taken aback by Monday’s snow on the last day of summer — guess you haven’t lived in Colorado Springs long enough.
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.