Jul 9, 2020
This week I’m talking about tax-free bonds.
Today, I want to talk about who should really consider buying tax-free bonds. The main issue I see is that too many investors who are retired with lower incomes and in lower tax-brackets are the primary owners of these types of bonds.
Here’s the principal to follow when considering tax-free municipal bonds: the higher your income and taxes, the more these bonds make sense. They start to lose their appeal, usually when you get 2-3 rungs below the top tax rate.
So really, you should only consider tax-free municipal bonds if your income is high and you’re in a higher tax bracket, because at those higher tax rates, the fact that you won’t pay taxes on the bond interest you’re earning is very compelling.
But if you’re retired and you’re going to have an income of around $40-50k this year, that puts you in the 12% tax bracket, where tax free municipal bonds just don’t make a whole lot of sense anymore.
The other consideration is that you should really only invest in tax-free bonds when you have assets in a taxable account - this could be a trust account or a joint or single account. You don’t want to invest in tax-free bonds inside of an IRA or a 401k because the tax-free income is negated in that scenario since you’ll pay taxes anyways on the income you withdraw from those accounts.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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