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Ask Ed Questions & Answers: A Nationally Recognized Financial Planning Expert On How To Seek Tax Free Income



Ask Ed Questions & Answers: A Nationally Recognized Financial Planning Expert On How To Seek Tax Free Income

Taxes may be going up – again – in the near future.
(Free Gift At Bottom Of This Post For First 500 Requests)

Question:  Do Tax-free municipal bonds have a place in your portfolio?

Answer: Generally, if your income tax rate, after deductions, is 25% or higher, you may be good candidate for tax-free bonds.

Question: What are my choices, when seeking tax-free income?

Answer: You have several choices:

DIY. This involves buying bonds from brokerage firms and doing all the research and monitoring for both credit quality and prices. Transparency can be challenging and markups are not disclosed, so you may significantly overpay. But at least there are no management fees and you can assemble a portfolio of individual bonds, each with a stated final maturity.

Traditional bond funds, which have much higher expenses, including management fees, than their exchange-traded fund (ETF)counterparts. Neither feature a stated final maturity, which can create significant financial planning challenges.

There is no guaranty of return of principal.

Some common ETFs target a certain time horizon, such as 10 years or 20 years, but this feature simply  provides constant exposure to the performance  the underlying bonds. The ETFs never actually mature.

Another choice is the separately-managed account (SMA). SMAs are individual accounts with individual bonds that have stated final maturities. This makes financial planning less challenging as you know exactly when a particular bond will mature.

This can eliminate the need to sell a bond fund or ETF in order to raise cash thus eliminating the risk of receiving less than you paid for it.  Prices for bond funds as well as their ETF counterparts are in constant motion.

The knock on SMAs are the fees. And in the fixed-income arena, low fees are critical to your success. SMAs comprised of equities may help offset exorbitant fees with the next Tesla or Google, but bond portfolios lack this type of opportunity to attempt to compensate for high fees.

Finally, with all three of these choices, you will pay management fees as well as advisory fees tacked on, if you work with a financial advisor.  Collectively, the annual fees can easily amount to 1.0% to 1.50%. Given today’s record low interest rates, the financial advisor and the SMA manager they select can make more money than you from your investment.

One sensible alternative is to work directly with a tax-free municipal bond manager-a registered investment advisor specializing in bonds. This at least eliminates the need to involve a financial advisor- the middleman.

Management fees alone can range from as little as 0.10% to upwards of 0.75%, depending on the account value and other factors.

For instance, my firm specializes in managed accounts of tax-free municipal  bonds and our fees are on the lower end of this range. We keep our expenses down and pass the savings to our clients, who can hold their bonds at the custodian of their choice. We customize each portfolio and can avoid state income taxation as well as federal by creating a portfolio comprised of bonds issued in your particular  state of residence.

Question: What about taxable municipal bonds?

Answer: Taxable municipal bonds are more prevalent now due to some recent changes in tax law pertaining to refunding or refinancing of bond issues.

Taxable municipal bonds can be a good choice for retirement accounts, including IRAs.

Have a question? Contact Ed Mahaffy.

We Highly Recommend You Read Ed Mahaffy’s eBook
Request Free Copy: How To Select A Financial Advisor

If You Would Like A Hard Copy Of His Book As We Have Arranged For 500 Tax Professionals To Receive A Hard Copy.

All You Need To Do Is Contact Ed Directly At 501.603.0406. Request His Address,  Send Him A Self Addressed And Stamped 7X10 Padded Envelop And You Will Receive A Hard Copy With Our Compliments.

Ed Mahaffy

Our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and understand your tolerance for risk. Long-term relationships that encourage open and honest communication have been the cornerstone of my foundation of success.

Our approach is cost-effective and tax-efficient. As an independent investment advisor, we can offer you a personalized financial strategy, not a generic investment program. Your individual portfolio will be based on your unique situation, your values, your preferences and your goals. It will be designed to account for change, in the markets and in your circumstances.

As your professional partner, we’ll work hard to earn your trust and confidence, and provide the advice and service you deserve. Send me a note regarding any questions you may have about any particular investment concepts or products. We’ll get back to you quickly with a thoughtful answer.

Request A Copy of “How To Select A Financial Advisor” at

https://www.clientfirstwm.com/download-my-book

You can reach me directly at ed@clientfirstwm.com or call 501.603.0406

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