| Tax-Free
Investment Options |
Published: August 30, 2005
Investors are all
too familiar with the old saying -- "Nothing in life is certain but
death and taxes." And while recent changes in U.S. tax laws have
certainly been favorable to investors, taxes can still take a big bite
out of your long-term returns.
Taxes
are particularly important for income-oriented investors. The chart to
the right depicts the growth of a $50,000 investment that yields
dividend income of 7% annually. Assuming that the current 15% tax rate
on dividends persists over the entire 25-year period covered by the
chart, taxes would take out more than $50,000 worth of returns.
The situation is even worse if
you're investing in bonds. When it comes to bonds, interest income isn't
taxed at that special 15% rate -- this income is instead taxed at the
full rate. For investors in the top income tax brackets, that means
giving up about one-third of total returns -- a nasty bite out of any
portfolio.
While you'll never be able to
completely foil the taxman, investors can certainly take steps to reduce
their annual tax burden by adding some tax-free dividend stocks or
tax-free bond investments to their portfolios. Several different classes
of tax-advantaged investments are worth exploring further, and with the
end of the tax year fast approaching, it might be a great time to
consider adding a few to your portfolio.
Municipal Bonds
Municipal bonds (munis) are issued by state or local governments and are
used to fund such local projects as highways and schools. In an attempt
to make these bonds more attractive to investors and make it easier for
local governments to raise funds, the government has made most munis
exempt from federal taxes.
This tax-exempt feature can
have an enormous impact on annual returns for investors. In fact, muni
bond investors often calculate what's known as a taxable equivalent
yield to compare the return on tax-free munis to other bonds. This
yield is simply a measure of how much return an investor would need out
of a fully taxed bond to equal the return from a tax-exempt bond.
Consider, for example, an
investor in the 35% income tax bracket who wishes to buy a tax-free
municipal bond paying 8%. In order to achieve the same level of return
from a fully taxed bond, that investor would have to find a bond that
yields over 12.5% (the taxable equivalent yield).
Investors can buy into
municipal bonds in a number of different ways. One is to simply buy a
fund that specializes in this area. The other is to purchase companies
that buy munis directly and pass through tax-exempt dividends to
shareholders...
---------------------
Important: To view the remainder of this article, in which
StreetAuthority.com founder Paul Tracy and his staff provide a listing
of attractive municipal bond funds, as well as an in-depth profile of
two high-quality common stocks that offer 7.5% tax-free yields, you'll
need to subscribe to our premium Market Advisor newsletter. To learn
more, please visit the following link:
https://www.streetauthority.com/subscribe-ma.asp
Good investing!


-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Editor in Chief in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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