Morningstar Magazine - August/September 2018 - 47

How Medicare Part B Premiums Are Determined
Modified Adjusted Gross Income (MAGI)

Individuals With a MAGI of $85,000 or Less
Married Couples With a MAGI of $170,000 or Less
Individuals With a MAGI Above $85,000 up to $107,000
Married Couples With a MAGI Above $170,000 up to $214,000
Individuals With a MAGI Above $107,000 up to $133,500
Married Couples With a MAGI Above $214,000 up to $267,000
Individuals With a MAGI Above $133,500 up to $160,000
Married Couples With a MAGI Above $267,000 up to $320,000
Individuals With a MAGI Above $160,000
Married Couples With a MAGI Above $320,000

Part B Monthly Premium

Prescription Drug Coverage Monthly Premium

2018 Standard Premium = $134

Your Plan Premium

2018 Standard Premium + $53.50

Your Plan Premium + $13

2018 Standard Premium + $133.90

Your Plan Premium + $33.60

2018 Standard Premium + $214.30

Your Plan Premium + $54.20

2018 Standard Premium + $294.60

Your Plan Premium + $74.80

Source: Medicare.

withdrawn, it will be taxed at ordinary rates-
the same as if held in a taxable account.
As an added benefit, because high-yielding
investments such as bonds tend to have
lower expected returns than equities, the required
minimum distributions will be lower than
if higher-appreciating equities were held in
the account.
3 Appreciating investments, such as equities,
go in the taxable accounts. Because appreciation
isn't taxed until sold, these assets effectively
achieve tax deferral without being held in
a tax-deferred account. When eventually sold,
the appreciation will be taxed at capital-gains
rates. Holding these assets in an IRA (or
other tax-deferred account) would convert the low
capital-gains tax rate to the higher ordinary
tax rate. Also note that if appreciated investments
are held in a taxable account at death,
the basis step-up will permanently avoid tax.

Based on the traditional static location
optimization strategy, once asset types are placed
in appropriate accounts, the decision is never
revisited. This approach can be counterproductive
in times of volatile market conditions and
ever-changing tax laws.
For example, most investors who practice
location optimization hold U.S. bonds in

tax-deferred accounts. However, with the surtax
on net investment income and municipal bonds
often paying interest almost equivalent to
(or even more than) corporate bonds, should we
be locating (and investing) differently? Depending
on an investor's particular tax situation, it
might be more advantageous to own municipal
bonds in taxable accounts and place higheryielding bonds (such as emerging-markets and
high-yield bonds) in tax-deferred accounts.
This dynamic asset-location strategy (based
on relative municipal- versus taxablebond returns and tax implications) could require
repositioning trades as market or tax conditions
change. Therefore, the costs of repositioning,
such as transaction costs and tax costs, need to
be considered. If repositioning will result
in taxable gains, the following questions should
be considered:
3 How material is the gain?
3 Does the investor have capital losses to offset
or are they in a low tax bracket?
3 How old is the investor? (Appreciation will
likely be taxed at some point for a young investor.
In this case, paying tax now would just be
a timing difference. However, an older client
might never pay tax on the appreciation.
Thus, recognizing gains for an older client would
make the tax cost too steep.)

3 Will the reduction in taxable investment income
be greater than the tax on recognized gain?

To maximize tax benefits, investors must
embrace dynamic location optimization, while
periodically reviewing underlying assumptions.
When choosing where to locate a given
class of investments, one must:
3 Compare municipal-bond yields to taxable yields.
3 Revisit the ordering of investments on a
scale from least tax efficient to most tax efficient
considering the impact of new tax laws.
3 Consider individual investor circumstances when
determining whether or not to carry out
repositioning trades.

Despite rising interest rates and new tax laws,
bonds should still be a part of a well-diversified
portfolio. To make the most of bond
investments, tax impacts-especially location
optimization-should be considered. K
Sheryl Rowling, CPA/RFS, is principal of Rowling
& Associates and head of rebalancing solutions
with Morningstar.

global.morningstar.com/Morningstarmagazine

47


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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018

Contents
Morningstar Magazine - August/September 2018 - Cover1
Morningstar Magazine - August/September 2018 - Cover2
Morningstar Magazine - August/September 2018 - 1
Morningstar Magazine - August/September 2018 - 2
Morningstar Magazine - August/September 2018 - Contents
Morningstar Magazine - August/September 2018 - 4
Morningstar Magazine - August/September 2018 - 5
Morningstar Magazine - August/September 2018 - 6
Morningstar Magazine - August/September 2018 - 7
Morningstar Magazine - August/September 2018 - 8
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