How to Use the Tax Code to Save More, Pay Less, and Minimize the Burden on Your Heirs

Marianela Collado grew up in an immigrant family that emphasized hard work and financial prudence. His parents emigrated from the Dominican Republic to the United States, where Collado’s father ended up running a janitorial team in Queens, NY, and saved enough money to buy a two-family house there.

These days, Collado is a South Florida wealth advisor whose passion is lowering tax bills. Working within the tax code, she says investors can save more, pay less tax, and transfer money tax-deferred or even tax-free to their heirs.

She went to college to become a teacher, but changed majors after taking a tax course and became a chartered accountant instead. She first worked for accounting firm Arthur Andersen until its collapse, then spent more than a decade advising wealthy investors at Bessemer Trust. In 2015, she joined Plantation, Florida-based Tobias Financial Advisors, where she is now CEO and co-owner.

Collado’s myriad strategies include using 529 college savings plans as revocable wealth transfer tools and, for some high-income earners, setting up private pension plans to defer taxes, while ‘she advises other clients to pay taxes now to avoid them in retirement.

We spoke to Collado for tax advice ahead of April 15 as well as his take on what’s likely to happen to taxes under the Biden administration. An edited version of our conversation follows.

Barrons: What is the biggest tax mistake people make when they retire?

Marianne Collado: I see people selling property and triggering capital gains taxes. Then they die. They forget the huge benefit of dying with highly valued assets.

Are you talking about the increase in the base when people inherit assets?

Yes. Upon your death, the value of all assets will be increased to the value on the day of your death. So basically any unrealized gains you might have tied to that property are gone.

What if someone really needs the money from the sale of the property?

There are better ways to get cash without selling your primary residence, like a reverse mortgage. This is a better option than selling it and triggering the capital gain.

Give me an example of creative use of the tax code?

I use 529 plans as an out-of-the-box savings plan. Most people think of them as college savings plans. But I see them as a tax-deferred wealth transfer tool.

A married couple can put up to $150,000 worth of gifts in each of them. And unlike many estate planning tools, the 529 plan lets you withdraw the money if you need it yourself.

You called it a wealth transfer tool. Don’t you have to use 529 plans to pay tuition?

If you use them for education, it’s all tax-free. If you don’t use them for education, you’ll enjoy tax-deferred growth and pay taxes and a 10% penalty on earnings. But if you have 10 or 20 years of tax-deferred growth, that far exceeds the 10% penalty you might pay later.

You told me that some workers can save tax by setting up their own private pension plan. How does this work?

The ideal candidate is someone who is in a high tax bracket, has a consulting business, or sits on a board of directors and doesn’t need that money to live on. We’re designing a defined benefit plan that pretty much allows him to shelter all that income and eliminate that tax.

When that person retires and is in a lower tax bracket, they begin to receive a pension or take the money as a lump sum.

Have you ever had any of your tips turned down by the IRS?

No, I don’t play like that. If it doesn’t use the guidelines provided by the tax code section, I wouldn’t recommend it. If it smells like it’s off, it’s off.

Should young workers who aren’t yet making a lot of money save money in after-tax Roth accounts rather than tax-deferred accounts like 401(k)s?

Yes. When you are starting out, if you are not in the highest bracket, you should use Roth accounts.

I used to recommend people in higher tax brackets use tax-deferred accounts. But I had an epiphany one day. It only makes sense to use a tax-deferred account if you have the discipline to save the money you don’t pay in taxes. If you spend it, you should use a Roth.

This goes against the conventional wisdom of deferring taxes until retirement.

You have the silent partner in the traditional 401(k) called the IRS. You don’t have a silent partner in the Roth.

If you’re in the 25% bracket at retirement, that 401(k) is only worth 75% to you, while the Roth is worth 100%.

How old were you when you knew you wanted to advise people on their money?

It started very early. I grew up with a mother who said, “Save, save, save”. I don’t care how much you earn, what job you have. I grew up with this discipline. I was buying stocks at 15.

I thought I wanted to be a teacher and went to Hunter College, a teachers’ college. But I fell in love with taxes when I took a college tax course.

Where do you add the most value as a fund manager?

On the planning side. Tax planning is such an important part of wealth management. You can’t have one without the other.

Unless you’re doing something outside the realm of normal wealth management, your portfolio returns will fall somewhere in the middle.

Some experts believe investors should take less interest in stocks when they retire. Do you agree?

The rule as you get older that your bond allowance should match your age, I completely disagree with. This could be a surefire way to shoot yourself in the foot. You need a portfolio that will take you not just into retirement, but throughout retirement.

If I have a 65-year-old client, I make projections that he will live another 30 years. With interest rates as low as they are now, it is very difficult to get the returns they might need by investing primarily in bonds.

What if you were wrong? Inventories in Japan have still not returned to their 1989 levels.

You have to spread that risk. It was Japan in the 1990s. It could be us now. That’s why you don’t put all your eggs into stocks in one sector.

Our portfolios try to hold the global market, not pick winning sectors or winning regions around the world.

How do you invest your own money?

I have a more aggressive allocation. I’m about 95% equity.

I am a long term investor. I am 43 years old. I have at least 15 to 20 years before thinking of retirement.

A new Democratic administration has just taken office with big spending plans. What does this tell you about the direction taxes will take in the future?

High High high. I don’t think they will do anything yet. They will wait for the economy to recover.

But they’re going to have to pay for all those expenses, and I think the low hanging fruit is taxing the rich. It’s not a question of if. It’s a question of when.

What should taxpayers do to prepare now for future tax increases?

Anyone considering selling a business might be thinking of accelerating it. There is a proposal to increase the capital gains rate to around 40%. Let’s sell this business while the tax rate is still 20%.

Thank you, Marianne.

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