When investing, it pays to do the arithmetic
Except for the very well off, everyone needs a safety net in cash, CDs or other fixed-income investment.
Q: My husband and I will both be 70 this year and have some money invested in municipal bonds.
Do we have any business being in municipal bonds when our tax bracket seems to be between 10 and 15 percent because of our expenses and donations?
A:Here’s the basic arithmetic: According to Bloomberg, a well-rated five-year municipal yields 1.18 percent, tax-free.
A five-year Treasury yields 1.73 percent, taxable.
Divide 1.18 by 1.73, and you get 0.68. So you’re getting 68 percent of the yield on a taxable Treasury.
What does that mean? Simply this: Only households that pay income taxes well over the 33 percent rate would benefit in terms of income they can spend or reinvest.
Households that pay taxes at a top rate of 15 percent are actually losing spendable income when they invest in tax-free munis of this maturity.
Q: I am 67 years old and I am continuing to work. I may work until I am 90.
So am I still able to defer income in an IRA after age 70½ — or when distributions begin, must I just begin withdrawing?
— D.F., Seattle
A: Once you have reached 70½, you can no longer contribute to an IRA.
You must also take required distributions from both IRA accounts and 401(k) accounts at a former employer.
You can, however, continue to contribute to your current employer’s 401(k) plan or Roth 401(k) plan.
Also, if your income doesn’t disqualify you, you can contribute to a Roth IRA.
Finally, if your employer will accept it, you may be able to roll your IRA assets into your current employer’s 401(k).
Doing that will end the need to make distributions until you no longer work and have rolled your 401(k) assets into an IRA rollover.
Copyright 2014, Universal Press Syndicate