The Tax Questions Blog

Posts Tagged ‘bonds’

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Question: Can someone please tell me if I did this problem correctly...?

if an investment is deemed not to be taxable, then the before tax yield and after tax yield will be the same. I found the formula and tried to work it out. Could you please tell me if I am on the right track? With a 28% marginal tax rate and the investment's expected annual yield is 3%, This is what I came up with:

after tax yield = 3% / (1-.28)
= 3% / .72
= 0.0417 or 4.17%

Now is the 4.17% equivalent to the 3%? I am confused because it says that the before and after tax yields should be the same. Please help me on this. Thank you,

Answer: You misunderstand the statement. What it is asking you is:

If I can get a 3% annual yield on a tax free investment, what percent annual yield would I need to get from a TAXABLE investment if I am in the 28% income tax bracket.

In order to net the same profit, you would have to get a taxable investment that provides you an annual yield of 4.17%.

Now, see how clear it is?

The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy $15.91 Advice on protection and profits in the short and long term future from the experts who accurately predicted the financial crisis of 2008, and who now have more detailed information about what is yet to comeFrom the authors who accurately predicted the domino fall of the conjoined real estate, stock, and private debt bubbles that led to the financial crisis of 2008 comes the definitive guide to p...

The Fundamentals of Municipal Bonds (Wiley Finance) $38.93 The definitive new edition of the most trusted book on municipal bondsAs of the end of 1998, municipal bonds, issued by state or local governments to finance public works programs, such as the building of schools, streets, and electrical grids, totaled almost $1.5 trillion in outstanding debt, a number that has only increased over time. The market for these bonds is comprised of many types of prof...

Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income (Bloomberg Financial) $51.55 A practical guide to profiting from the high yield municipal marketThis unique guide to the high yield municipal bond market sheds some much-needed light on this esoteric but profitable corner of the fixed-income world. It fills the void between the general reference handbooks on municipal bonds and the superficial treatment of do-it-yourself bond guides, with an emphasis on practical trading appl...

Brazos Higher Educ. - Unaudited Financial Statements

Brazos Higher Educ. - Unaudited Financial Statements

Investment Management Series: Lyle Fitterer

Question: Would yields would be higher or lower on taxable bonds?

Answer: Yields should be higher on taxable versus tax-free bonds.

Fitch Rates Eagle Pass, Texas GO Bonds 'A'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to Eagle Pass, Texas general obligation (GO) bonds as follows: --$6.895 million GO tax refunding bonds, series 2010. The bonds will be sold via negotiation on Oct. 13, 2010. Proceeds will be used to refund series 2007 combination tax and limited pledge revenue certificates of obligation (COs). In addition, Fitch affirms the ...

Wealth Enhancement & Behavioral Finance, Intelligent Indexing

Question: Which types of investments benefit most from being in an IRA?

I have roughly half of my money in IRAs and half in taxable investments. If I have a diversified portfolio, which investments should be placed in the tax free environment in order to maximize my total return? I'd like a list in the following form

(best in IRA) #1 actively traded investments
with high turnover
#2 ?
#3 ?
...
(best outside IRA) #N Tax free bonds

It would be great to have answers from people who have actually run the numbers themselves (as a physicist I have little trust in the math illiterate) I am particularly interested in seeing where one would rank "value" mutual finds vs "growth" funds as I have seen different opinions on this. Also interesting: index funds, SPDRs, foreign mutual funds, REITs, taxable bonds, something else?

Assume I have a middle class income (60k/yr) if that makes a difference.

Answer: First, we need to distinguish between a traditional IRA and a Roth IRA. The numbers run very differently between the accounts. Second, the primary "value" of an IRA is the tax deferral (i.e., you don't pay taxes on the income until retirement. However, when you pay the tax, you pay at your normal marginal income tax rate. (That is, you don't get long-term capital gains treatment even if you hold stocks in the account. Everything is taxed at your ordinary tax rate.)

So, suppose that you have 50% of your money in a traditional (non-Roth) IRA and 50% of your money in a taxable account. Suppose also that you want to have 50% of your money in stocks (a broad-based index fund) and 50% in bonds (let's say CDs at a bank). Suppose (for simplicity and you can easily generalize) that stocks pay no dividends and there is no turnover in the index.

Your choice is between putting stocks in your IRA or your taxable account with bonds going into the other account. This is what I consider to be the "baseline" decision. I attach a reference to an article in the June 2004 JOF for your perusal, but let's try an example.

Suppose you will invest for 30 years. Your goal is pay all of your taxes after 30 years and have the most amount of money after-tax. (Optimal witthdrawal strategies are another subject.) Bonds earn 4% (like they do now). The expected return on stocks is 9%. (We will ignore risk. you can use simulation to get your hands around risk better.) Your ordinary tax rate today and in 30 years will be 40% (combined federal and state). Your capital gains rate is 20% (combined federal and state). You have $100,000 in your IRA and $100,000 in your taxable account.

If you put your bonds in the IRA and stocks in your taxable account, you will have $194,604 after-tax in bonds after 30 years and $1,081,414 in stock in your taxable account after 30 years. The total is $1.276 million.

If you put stocks in your IRA and bonds in your taxable account, you will have $203,704 in bonds after-tax and $796,061 in stock after-tax -- $999,764 in total. Most of the $276,253 difference is dependent upon the difference between 40% and 20% tax on gains from your stock; however, about $40K of the difference is due to the fact that stocks are ALREADY tax-deferred, if you just don't trade them.

Your wealth swings 25% based just upon where you LOCATE your assets. (You have the same asset allocation in each case.)

This analysis can be generalized for dividends, turnover in the stock portfolio, different expected returns, tax-loss harvesting, Roth IRAs, risk (using simulation), and a host of other issues. An important issue is that you would likely want to re-balance the stock/bond ratio in your portfolio back to 50% each year. However, this analysis provides an important rule of thumb.

Put low turnover stock funds in your taxable account and bonds in your IRA. In general, I stay away from high turnover funds because they "cost me space" in my IRA (you can calculate the value of the "space" explicitly).

Good luck.

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Retirement Money Wave: Generate Automatic Tax-Free Income for the Rest of Your Life $12.52 ...

Financial Management for Nurse Managers and Executives, 3e $63.06 Covering the financial topics all nurse managers need to know and use, this book explains how financial management fits into the healthcare organization. You'll study accounting principles, cost analysis, planning and control management of the organization's financial resources, and the use of management tools. In addition to current issues, this edition also addresses future directions in financi...

Capital Trust Reports Second Quarter 2010 Results

Capital Trust, Inc. today reported results for the quarter ended June 30, 2010.

Investing & Retirement Funds : Benefits of Investing in Taxable Accounts

Question: Homework Help: Tax Yield?

A 10-year, 10% bond issued by the State of Missouri to help build a bridge to
St. Charles would have the following equivalent taxable yield if you are in the
34% tax bracket:

29.4,15.1 or impossible to determine

Answer: 1.00 * .10 = 1.00 * xxx * .34, solve for x.

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) $8.91 This classic text is annotated to update Graham's timeless wisdom for today's market conditions... The greatest investment advisor of the twentieth century, Benjamin Graham, taught and inspired people worldwide. Graham's philosophy of "value investing" -- which shields investors from substantial error and teaches them to develop long-term strategies -- has made The Intelligent Investor the stock ...

The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy $15.91 Advice on protection and profits in the short and long term future from the experts who accurately predicted the financial crisis of 2008, and who now have more detailed information about what is yet to comeFrom the authors who accurately predicted the domino fall of the conjoined real estate, stock, and private debt bubbles that led to the financial crisis of 2008 comes the definitive guide to p...

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Kinnear steps into income trust void with royalty vehicle for investors

CALGARY -- The search for yield started the day after the 2006 Halloween massacre, when Ottawa blocked income trusts. Now one of the best-known faces in Calgary's oil patch believes he might have the next big thing.

Question: Inherited US savings bonds questions - taxes?

Series I bonds from mother's estate were jointly owned by mother and a child. Three of the five children's bonds remain. (The other two batches were redeemed to help finance a new home for mother.) Now we need to distribute those bonds and other funds equally to the five children. Since the bonds have different accumulated interest (ranging from $2000-$5000) and everyone's tax rate is different - what is the best way to fairly distribute these bonds? The I Bonds are now paying almost 8%!! OR, can the bonds be cashed and taxable to the estate? OR, is there some way to do this that I haven't considered. THANKS in advance for any help!!!!

Answer: I am not sure about I-bonds, but MOST assets are inherited at the MARKET value on the date of death. That means any interest accrued up to the date of death is NOT taxed to anyone.

Leader Short Term Bond Fund (LCCMX) Declares Capital Gain Distribution

PORTLAND, Ore.----The Leader Short Term Bond Fund announced a short term capital gain distribution of $0.10 per share on December 28th, 2009 to shareholders.

Where do bond funds fit in your portfolio?