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

March 14, 2021

Marianela Collado grew up in an immigrant family that emphasized hard work and financial prudence. Her parents emigrated from the Dominican Republic to the U.S., where Collado’s father ended up running a janitorial crew in Queens, N.Y., and saving enough money to buy a two-family home there.

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

She went to college to become a teacher, but switched majors after taking a tax course and became a certified public accountant instead.  She worked initially at the Arthur Andersen accounting firm until its collapse, then spent more a decade advising high-net worth investors at Bessemer Trust. In 2015, she joined Plantation, Fla.-based Tobias Financial Advisors, where she is now CEO and co-owner. 

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

We talked to Collado to get some tax tips before April 15, as well as her views on what’s likely to happen to taxes under the Biden administration. An edited version of our conversation follows.

Barron’s: What’s a big tax mistake people make in retirement?

Marianela Collado: I see people selling property and triggering capital-gains taxes. Then they pass away. They forget the huge perk of dying with highly appreciated assets. 

You’re talking about the step-up in basis when people inherit assets?

Yes.  When you pass away any assets will have their value stepped up to the value on the day you pass. So essentially all of the unrealized gains you may have related to that property disappears.

What if somebody really needs the money from the property sale?

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

 Give me an example of using the tax code creatively?

I use ‘529’ plans as an out-of-the-box savings plan. Most people consider them as college savings plans. But I look upon them as a tax-deferred wealth transfer tool.

A married couple can put up to $150,000 of front-loaded gifts in each one. And unlike a lot of estate planning tools, the 529 plan allows you to pull the money back if you need it yourself.

You called it a wealth-transfer tool. Don’t you have to use 529 plans to pay for education expenses?

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

You’ve told me some workers can save taxes by setting up their own private pension plans. How does this work?

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

When that person retires, and is in a lower tax bracket, he begins receiving a pension—or takes the money as a lump sum.  

Have you ever had any of your advice disallowed by the IRS?

No, I don’t play around like that. If it’s not using the guidelines provided by the Internal Revenue Code section, I wouldn’t recommend it. If it’s smells like it’s off, it’s off. 

Should young workers who aren’t yet earning big money be saving money in after-tax Roth accounts rather than tax-deferred accounts like 401(k)s? 

Yes. When you’re first starting out, if you’re not in the highest bracket, you should be using Roth accounts.

I used to recommend that people in high 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’re not paying in taxes. If you’re spending it, you should use a Roth.

That goes counter to the conventional wisdom of deferring taxes until retirement.

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

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

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

It started early on. I grew up with a mother who would say, ‘Save, save, save. I don’t care how much you make, what job you have.’

I grew up with that discipline. I was buying stocks at 15 years old.

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

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

On the planning side. Tax planning is such a big part of wealth management, you can’t have one without the other.

Unless you’re doing something out of the realm of normal wealth management, your portfolio returns are going to be somewhere in the middle.

Some experts think investors should lighten up on stocks as they enter retirement.  Do you agree?

The rule as you age, that your bond allocation should match your age, I completely disagree. That could be a sure way of shooting yourself in the foot. You need a portfolio that will take you not only to retirement, but through retirement.

If I have a 65-year-old client, I’m running projections that they’ll live for another 30 years. With interest rates as low as they are now, it’s very hard to get the yields they might need by investing primarily in bonds.

What if you’re wrong? Stocks in Japan are still not back to their 1989 levels.

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

Our portfolios try to own the global market, not try to cherry-pick winning sectors or winning regions in the world.

How do you invest your own money?

I have a more aggressive allocation. I’m pretty much 95% in equity.

I’m a long-term investor. I’m 43 years old. I have at least 15 to 20 years before I think about retirement.

A new Democratic administration has just taken office with some big spending plans. What does that tell you about where taxes are headed in the future?

Up, up, up.  I don’t think they’ll do anything right now. They’re going to wait for the economy to recover.

But they’re going to have to pay for all this spending, and I think the low-hanging fruit will be taxing the wealthy.  It’s not a matter of if. It’s a matter of when.

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

Anybody planning to sell a business might think of accelerating it. There’s a proposal to increase the capital-gains rate to around 40%. Let’s sell that business while the tax rate is still 20%.

Thank you, Marianela.

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