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:
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. In some cases, it just may be.
It is this not so "black or white" sentiment, ironically, that is making closed end fund municipal bond investments more productive... as they move slightly lower in price. Here's the tax free vs. taxable mathematics, plus some additional important information:
• A Tax Free Yield of 5% = 7.7% taxable, in a 35% bracket; 6.9% in a 28% bracket; 6.67% in a 25% bracket; but just 5.56% in a marginal 10% bracket. (Note: there are many taxable CEFs yielding more than 7.7%, so in any bracket, some strategic thought is necessary.
• There are still dozens of tax free muni bond closed end funds (CEFs) 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), as well as mathematically.
• 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. All are less risky than equities, including all forms of equity ETFs... but you knew that, right.
There seems to be at least three issues that investors need to deal with, after speaking to their trusted tax professional:
• Does tax free income above 5% make as much financial sense for you now as it did before you moved into a lower marginal tax bracket?
• Should I, once again, start paying my IRA management/transaction fees from my IRA, since they are (probably) not deductible anyway, 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?
...and one issue where income tax advice is far less critical:
• In two of past three major stock market corrections (and there will be another stock market correction eventually), investors, particularly late arrivals to the party, swarmed into income focused investments as they threw their overpriced equities out their virtual Window's windows.
My personal approach to all four issues has been:
• To shift my tax free holdings exclusively into above 5% 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.
• All of my equity (and income, yeah, really) security profits are taken at lower than normal levels to assure abundant "just in case" liquidity. Most equity investments are in the form of managed CEF portfolios, because they can be added to safely (and at even higher yields) when the markets start to cycle downward.
The little known " Market Cycle Investment Management" process has successfully navigated all three major market meltdowns since the 1970's. The "Brainwashing of the American Investor: The book that Wall Street does not want you to read" will prepare you for the inevitable.