Cents and Sensibility
Cents and Sensibility
Question: With the recent volatility in the stock market, a friend suggested I look at tax-free bonds for some of my money. Can you explain what they are and how they work? Help yourself and your
community by investing
in municipal bondsAnswer: Municipal bonds are issued by villages, cities, counties, states, state agencies and special districts to finance a multitude of projects. For instance, the state issue bonds to help pay for a new school or to build additional highways or bridges; one of the counties may issue bonds to improve its sewer system.
When you invest in a municipal bond, you receive a fixed interest payment every six months and the satisfaction of knowing you helped make local improvements possible. Better yet, all the interest you receive from municipal bonds is free from federal income tax. However, you may be subject to alternative minimum tax.
And if you're a Hawaii resident buying a Hawaii bond it's state tax free. If you buy an out-of-state bond, then it's taxable at the state level.
Municipal bonds can provide significantly more after-tax income than comparable taxable investments. Even knowing this, you may be surprised the first time you compare the rates paid by tax-free and taxable investments. Remember, to get the true picture, you must compare after-tax returns.
For example, if you are in the 27 percent federal tax bracket, you would have to find a taxable investment paying 6.16 percent to yield the same after tax return of a tax-free investment paying just 4.5 percent.
Not all municipal bonds are created equally. Before investing, do your homework. Ask about the features of the bond. Is it insured? Does it offer call protection, so the bond cannot be called prior to maturity? Both are important questions.
If you've gotten satisfactory answers to these questions and you could benefit from regular tax-free income, give municipal bonds a try. It's a great way to give both your community and your tax bill a helping hand.
Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or by email at: gsteele2@pixi.com
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com