Publication: Investor's Notebook
TAX-FREE BOND INCOME MAY NOT ESCAPE TAXES | |
Subscribe FREE to Investor's Notebook by clicking here.
Investor's Insight - Friday, January 27, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
************************************************************
Comment The Post Below...
TAX-FREE BOND INCOME MAY NOT ESCAPE TAXES
by Scott Burns
Q: I'm at a loss to understand how municipal bonds work.
In January 2003 I was advised to invest in a municipal
bond fund that specialized in short-term bonds. Now,
almost three years later, I've barely seen any gains in
my quarterly reports. Sometimes, the report shows that
I've lost money. Other times, it shows a small gain. Mean-
while, the management firm takes about $1,200 in yearly
fees.
My financial adviser says this is to be expected because
none of the bonds have matured this year and because the
fund keeps shifting its investments. About 5 percent of
the bonds will mature in less than a year, 33 percent in
one to two years, and 62 percent in two to five years.
Is my financial adviser right? Is it just a question of
"staying the course" and waiting for the bonds to mature,
or should I get out of this fund as soon as possible?
-- R.S., by e-mail
------------------------------------------------------------
The Most Powerful Small Business Software Package Around is
Now free For A Limited Time...
You read it correctly... For a limited time, Small Business
Pro, which normally sells for $29.99 is yours for just s&h.
Whether you're just getting started in business or well on the
way to success, get the help you need to keep it legal with
Small Business Pro. This CDRom contains six bestselling
business books that are in a searchable online format:
- Tax Savvy for Small Business
- Legal Forms for a Small Business
- Starting and Running a Small Business
- Employer's Legal Handbook
- Marketing Without Advertising
- How to Write a Business Plan
But the meat of Small Business Pro is the inclusion of the
forms and contracts (over 125). Don't wait to pick this piece
of software up, because it will instantly start saving you
money the moment you use it. Plus with it being just the cost
of s&h, supplies won't last long. To get your copy visit:
Small Business Legal Pro
------------------------------------------------------------
A: Investing short term, whether it was in tax-free or
taxable bonds, hasn't been a very good play in the last
three years because the Federal Reserve has been increas-
ing the only interest rates it can change -- short-term
rates. As a consequence, the net asset value per share
of short-term bond funds has tended to decline as the
yield on short-term securities has risen.
As a practical matter, while short-term bond funds have
performed relatively poorly compared to long- or inter-
mediate-term funds, your adviser was probably trying to
protect you from the greater damage that can occur to
long term bonds when (and if) interest rates rise.
Q: My wife and I are retired and debt-free. The three
sources of our income are our state's teacher retirement
system, municipal employees' retirement fund and Social
Security. We are approaching the age of mandatory IRA
withdrawals. We would like to place these funds where
we would not have to pay taxes again and begin to draw
tax-free earnings.
Our thoughts are to build a five- to eight-year municipal
bond ladder, or to purchase shares in municipal bond funds
of various maturities. With the bonds we would pay a broker
mark-up but receive full principal at maturity. With the
funds, we would pay small fees but lose principal if we
had to sell at a lower price than our purchased price.
What do you suggest? -- R.P., Des Plaines, Ill.
------------------------------------------------------------
Treat Your Feet to the Most Comfortable Experience Ever
After a long hard day you deserve to slip your tired feet
into the squishy-softness of this revolutionary, new, at-home
foot massager. At the press of a button, enjoy a soothing,
deeply penetrating foot massage on either high or low settings.
This foot massager is so remarkably soft, words cannot describe
the comfort you will feel, you just have to try it yourself.
Order now for only $29.99 when you visit:
Foot Massager
------------------------------------------------------------
A: To do this right you'll probably need the advice of a
good tax accountant. It is very likely that you face a tax
trap. Tax-free bond income is one of the sources of income
that must be counted when you are figuring whether your
Social Security benefits are taxable. As a consequence,
you could have tax-free municipal bond income that would
still work to increase your federal income tax bill because
each dollar of interest could trigger the taxation of 50
cents to 85 cents of Social Security benefits.
If you want to complain about this, direct your complaints
to the Republican and Democratic parties. The Republicans
put the tax in place. The Democrats increased it.
As an alternative, you may want to try a "Plan B," again
in consultation with a good tax accountant. If you truly
want to pay taxes only once, you should look into doing
a Roth-IRA conversion. You'll pay ordinary income taxes
on withdrawal, but once the IRA money is in a Roth IRA,
you'll have complete freedom in making withdrawals. And
all withdrawals will be tax-free.
Conversion would allow you to earn higher yields in taxable
securities but avoid taxation on any withdrawals.
Are there any pitfalls? Of course! You can't make with-
drawals from a Roth for five years without paying a penalty.
That's a good reason to start the Roth conversion now, be-
fore mandatory withdrawals.
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2005 UNIVERSAL PRESS SYNDICATE
-----------------------------------------------------------
GopherCentral's Question of the Week
Do you believe that the US should be in the business of
nation building?
Please take a moment to share your opinion, visit:
Question of the Week
************************************************************
Want some Fun and Amusements sent to your email F-R-E-E?
Visit:
More Fun & Newsletters
____________________________________________________________
END OF INVESTOR'S INSIGHT
Copyright 2006 by PENN LLC. All rights reserved.
Go ahead and forward this, in its entirety, to others.
 E-Mail this issue
Subscribe FREE to Investor's Notebook by clicking here.
|