Show #415 Airing Sunday 1/6/08
Here's a no-brainer: Always put your money into investments that pay the highest interest or dividends, right? 5% is better than 4%. Not so fast. Our next expert, Tony Mercuri, is here to tell us that when it comes to investment options sometimes less can be more. Tony is with Ta-Check Tax Service.
Question: When an investment is tax free, less can be more.
An example may be helpful. At first blush, you might think that a CD paying 5% would be better than an investment paying 4%. But if the lower rate investment is tax free, then less might be more. In the 25% tax bracket, a tax-free investment paying 4% would be the equivalent of a taxable investment paying 5.33%. And if you are in the 35% tax bracket a 4% tax-free investment would be equivalent to a taxable investment paying 6.15%.
Let me put this another way. If you invest $1000 in a tax-free investment paying 4%, you'd get $40 in a year. But a 5% CD, after you pay the tax, might leave you with only $34. . . . . $6 less!
Question: Numbers confuse people. BUt the bottom line is that, depending on your tax bracket, you might end up with more money investing in a tax-free investment paying a lower rate than a taxable investment like a CD?
Answer: Municipal bonds or municipal bond funds. Interest paid on municipal bonds is tax exempt from federal taxes, and usually state and local taxes as well. I say, "Usually exempt from state and local taxes" because, to get the "triple tax exempt," you would want to buy a state-specific muni bond or muni-bond fund.
Question: Can you buy only Ohio bonds living in Ohio?
Answer: No. You can buy any state bonds. Just compare rates and safety ratings.
Question: Are there other investments where less is more?
Answer: On certain REITS (Real Estate Investment Trusts) the dividends are not fully taxable. Sometimes up to 1/3 of the dividend comes to you tax-free. You may end up paying capital gains tax on it if it is sold, but remember the capital gains tax rate is lower than your income tax rate.
Tax-free bonds and bond funds might offer more for your investment money. For more information, give Tony Mercuri a call at the number that's up next.
