3 ways to prepare for the next Tax Season


April 15th has come and gone. And for all but the most die-hard procrastinators, myself included, “tax season” is over. But it’s never too early to prepare for the next round coming up.

What are some ways to minimize our taxes on investments?

1. Hire a knowledgeable CPA or tax preparer

(See my other blog for more info on hiring professionals.) Hiring a crafty tax expert is priceless. They can more than make up their fees by maximizing your deductions and creating a good tax strategy for your situation.

2. Invest in municipal bonds and funds

These are local government bonds that usually pay tax-exempt interest.They are very secure bonds with very low default rates, making them the second safest bond type after Treasury bonds.

I use one muni bond fund that pays over 6% yearly and is exempt from federal taxes. It has nearly 1,100 different local government bonds, pays monthly income and is liquid.

Here’s a link to a website created by a non-profit that explains all things bonds, including municipals.

3. Answer the tough question: “Will my retirement income be the same or higher in retirement?”

The answer to this question will either steer you towards or away from Roth IRAs and Roth 401k’s. My usual advice is that if you think you’ll make less income in retirement then a Roth may not be the greatest idea.

By using a Roth you give up a possible tax deduction today and may end up pulling money out while you’re in a very low bracket. If you’re in a low bracket during retirement, then you haven’t really saved much by taking a tax-free withdrawal. And you’ve paid taxes today on all contributions.

On the other hand, if you’ll have a higher tax bracket during retirement, then a Roth can be smart. You’ll take distributions at a potentially higher tax-free rate.

The flip-side to this argument is that tax rates could be much higher in the future. True. But who really knows what future tax rates will be? It’s more likely that we can estimate our income during retirement than guess what politicians will do in the future. So be vigilant in this decision of Roth’s versus regular retirement accounts.

4. Use annuities only when all other options are exhausted

Normally, I’m not a big fan of annuities for most investors. Why? They’re regularly abused by unscrupulous agents trying to get titanic commissions. And the end result is usually similar to The Titanic.

But for the right person they can be a good tool. Who’s “the right person”?

Someone who:

  • has maxed out all other retirement options
  • has high income (then the tax deferral is more valuable)
  • has higher net worth (which helps liquidity) &
  • is a business owner (not 100% essential but they have less pension options)

Hopefully these ideas help you out this time next year.


STOP! Read This Before Buying Municipal Bonds…


It’s been years (years!) that the muni-to-Treasury spread has been flip-flopped. Now that’s finally back to normal.

In a “normal” economy and interest rate environment, the 30-year municipal bond yield should be lower than the 30-year Treasury yield. It makes sense when you think about it: A tax-free yield should be lower than a taxable yield due to the tax advantage.

For many years the opposite was the case. What did that mean? That municipals were drastically undervalued compared to Treasury bonds. Investors were willing to get less income from a taxable investment because they were afraid of cities and states defaulting on their debt.

Are munis now over-valued? I don’t think so. They’re just making up lost ground. The above-mentioned yield spread needs to be much larger just to get back to normal. Then the spread needs to be even higher for munis to be overvalued.

And municipal bonds are 60%-owned by individual investors. This makes them less volatile than other bonds like Treasury bonds which have many international owners (like China and Japan) and institutional owners (like mutual funds and pensions) that can add to price volatility.

What’s the big point? Keep buying those munis. You get a big yield and even bigger yield when your tax bracket is factored into the return.

Of course, use them for a small portion of an intelligently allocated portfolio. You should have many other asset classes like US and international stock, real estate, short-term bonds, etc.