Money

Re-thinking IRA Fees and Tax Free Income In The New Tax Code Environment

Just when we thought we had handled the DOL mandated changes to our IRA fee payment arrangements, a new tax code comes along and changes everything... literally.

Read this "fine print" first: I am not an accountant and cannot give tax advice; please consult with your tax professional before making any changes to how you deal with fees in your investment portfolios. The information provided below is offered strictly from a portfolio management perspective.

My understanding is that investment management fees of any kind are no longer tax deductible, IRA or otherwise. Here's an article that speaks to this issue:

https://wtop.com/business-finance/2018/01/what-the-new-tax-law-means-for-your-2018-taxes

Additionally, the establishment of a whole new set of lower tax brackets (both individual and corporate) seems to have many investors thinking that tax free municipal bond income is less attractive than taxable income.

A Tax Free Yield of 5% = 7.7% taxable, in a 35% bracket; 6.9% in a 28% bracket; and 6.67% in a 25% bracket

There are still dozens of Tax Free Muni Bond Closed End Funds yielding over 5%, and many that are paying between 5.5% and 6.3%. My feeling is that the latter group is still very attractive, emotionally (the safety of principal element), if for no other reason.

Examine the chart on the page linked to below, to determine if tax free or taxable is better for you, bearing in mind that nearly all tax free CEFs (in my opinion) are less risky than nearly all taxable varietals.

https://www.aaii.com/journal/article/munis-vs-taxables-how-to-determine-the-taxable-equivalent-yield.touch

There are three issues that investors need to deal with, after speaking to a tax professional:

Is tax free income above 5% as important to me as it was before the tax code change?

Should I once again be paying my IRA management/transaction fees from my IRA, since they are (probably) not deductible and seem to be a "no tax, no penalty", disbursement?

Since a ROTH IRA is a tax free growth and income portfolio, wouldn't it be better to pay ROTH investment fees from some other checking or investment account?

My personal solution has been:

To shift my tax free holdings exclusively into 5% and above CEFs while adding a small percentages of taxable CEFs and 5% or better yielding equity CEFs to both my corporate and personal portfolios, slowly replacing the under 5% municipals. Note that my non IRA accounts are strictly "income purpose" portfolios.

My IRA fees are, once again, being taken as (presumably) non-taxable deductions from my IRA accounts.

I have no ROTH accounts, where all earnings from all sources are forever tax free, but my feeling is that all "management/transaction fees" (where possible) should be taken from other sources. This allows the compound earnings power of the ROTH vehicle to continue as long as possible.

unsplash-logo Lee Campbell

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