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Advice on Tax Free Bond Fund

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Q: How do I select a municipal bond fund from the veritable maze of available tax-free funds out there?
I’m trying to narrow my search for one or perhaps several tax-free bond funds to add to my portfolio. I tend to like the closed end variety. I’ve checked out offerings from Blackrock funds, Nuveen, Putnam, Morgan Stanley, Eaton Vance, et al. Man, there sure are a perplexing variety of funds to pick from! Many of them look like clones of each other, with only slight differences in the fund’s name.

What would be some filtering criteria that I should apply to selecting a tax free fund? NAV premium/discount, dividend history (increase or decrease – how to find this?), what happens to muni funds if the Fed lowers – or raises – interest rates, etc. Actually, I’m just about ready to give up and use a dart board to select a fund! Any professional help would be appreciated. (I don’t need a state-specific fund either, as my state does not have a state income tax.)

A: since all bond funds are buying from the [basically] same pool of issues, I would critically compare their operating expenses. Secondarily, I would look at their long term performance – at least 5 years- and their turn over rate. Turn over can mean a significantly higher tax event for you even if the overall performance is only mediocre.

There are ETFs and other close-ended funds that are dividend driven that might deliver as high a return as munis-Wisdom Tree and First Trust come to mind; I might look at RNE, PEO, USA, ASG, IFN, IAF or MIC for their growth and a very nice dividend to boot…[personally, these are some of my favorites, and have replaced most of my muni funds]

as far as “safe and reliable” like a muni fund
maybe look at a good G&I fund
You’d get a bit of growth with your income-again, almost too many to list, but Money, Kiplingers, Barrons, even Consumer Reports all run an end of the comparison for “best” in a given category.

good hunting…

Q: Is it wise to use Tax-free Muni Bond Mutual Fund instead of savings account?
Is it wise to use Tax-free Muni Bond Mutula Fund instead of savings account?..

Why or Why not?..
Thanks

A: No. Too much risk. You need ready cash kept in an insured bank account.

Q: Tax free bond funds?
What do you think of tax free bond funds? With rising interest rates will they produce lower yields? Is the money in them pretty liquid? Can I take out cash at any point?

http://www.kiplinger.com/personalfinance/tools/fundfinder/fundsearch.php?action=show_results
The top finds seem to yield about 8-9 %. Tax free. Is this a very safe investment?
yea, my kiplinger link does not work. I was looking at:
Oppenheimer Rochester Municipals Y RMUYX Total return 1 year 9.20%
Oppenheimer AMT NY Municipal A OPNYX Total return 1 year 8.73%

A: you can take out any dividends the fund earns with no problem. to get cash out other than that you can SELL some or all of your shares, or if you have a margin account the brokerage house may LOAN you money against the shares you have. ALL mutual funds are subject to market risk, i.e. price fluctuations.

The safety is a matter of how the bonds in the fund are rated, some governments do issue what is called junk bonds, not all that secure. Especially if the bonds are ‘revenue bonds’.

Q: if you have a tax free investment (mutual fund or bond etc.)do yo uhave to pay taxes??and if you do on what?
thank you

A: I am going to assume you are asking about interest income.

If you receive interest income that is exempt from federal taxes, that income is not added to your other income to figure your taxes. However, you still must list that interest on your tax return (Schedule B). Interest that is exempt from federal income taxes can change the federal income tax you owe by its effect on credits or deductions, or the tax on Social Security benefits.

Interest income that is exempt from federal taxes (such as municipal bond interest) is often taxed at the state level. Conversely, interest income that is exempt from state taxes (such as treasury bond interest) is often taxed at the federal level.

Q: Why are tax free municipal bond funds going down during this market correction. Thought they were fairly safe?

A: They are fairly safe, but the credit markets have all been badly affected by the subprime mortgage crisis. Weakness in one part of the market tends to spread to others.

Q: Should I put my money into mutual funds or into a Tax Free Bond?
I had my tax appointment and one thing my wife and I did this whole last year as we didn’t know what to do with our savings was to each month buy a 3month CD, and as it matured we would roll it over into another one. I had my tax appointment and she mentioned I should stop doing this as it is adding to my income and I’m paying taxes on it, and that I should do mutual funds or a tax free bond instead. She is booked until after April 15th and I don’t want to wait. Can anyone point me in the right direction? What are the advantages of a tax free bond over doing mutual funds? What makes more, and what is safer? My work 401k is through Mercer if that matters, or can I just do these through Scottrade? Any suggestions would be much appreciated to point me in the right direction.
Thanks in advance!*
I’m 29, my wife 27. I am not sure what bracket it is but I make about $200k and my 401k is maxed out, and my wife is a housewife. She has a 401k still but nothing new going into it as she is not currently working. No specific time frame on retreiving the savings except possible in a year or so if we move and I need it. From what you guys have mentioned so far is I wonder if my tax lady is good enough to visit again for this advice. She said she’s a CPA and a lot of experience with investing advice for upper-income individuals.

A: Mutual funds also have tax implications, unless you are putting that money into a retirement vehicle, where it becomes tax deferred. It all depends on what your appetite is for risk, yield, and what your tax bracket is, too. You didn’t state if your wife also has a 401K through work. So, you need to talk to a professional. If you waited this long to decide what to do, take the time to see a professional and get the right advice. No one can tell you what to do on this forum, they don’t know enough about your personal circumstances. In order to educate yourself about what might work well for you, go on Yahoo Finance, and select personal finance. There, you can start your research yourself. Other websites that may help you include www.bloomberg.com, and the Scottrade website you referenced. There is a great deal of information on mutual funds, stocks, ETF’s and bonds. But, you need to put the time in to study it. Do that before you commit a penny. Rush into something you don’t understand, and I can guarantee you will regret it later.

I read your additional information and warn you NOT to allow your CPA to put you into investments. I let one do that, he made plenty of money on commissions/fees but didn’t give me any alternatives to what he peddles–he spent my money in the least efficient manner possible, because he benefited personally from it. I have since learned that no one cares about your money as much as you do. Bonds can be risky, too. No doubt you are aware about the current credit crunch and that bond investors have lost much $. And why didn’t your CPA advise you to open a Roth IRA? That is paid with after-tax dollars. You can certainly do something for your wife, even though she is at home. There are special rules for spouses that don’t earn an income for Roth IRA’s. I don’t know the specifics-that’s why you need an expert who does.
Really, if I were your age and starting an investment program, I’d go to Schwab, they have a lot of free classes and training. You can find out everything you want to know, before committing a penny. If your CPA is going to make money by putting you into an investment, you have to question her motives for steering you to one particular investment over another.
Ask your CPA if she holds the NASD series 7 and 63 licenses. If she does, you can be sure she is thinking of her own Tax Return before yours!

Q: tax free muni fund, got in ”eanax” in spring 07 down5% with all reinvested dividends is this a safe invest ?
In 33% bracket it’s a long term bond fund with a good track record till I bought it think it could will recover soon or should I bail a take the loss

A: Dorseywright.com ranks all funds and has this as a thumbs down, score of 1 point on a scale where 6 is best. It recommends as an alternative BIBMX, Morningstar.com gives HICOX a high rank. They have so underperformed other investments, let alone combination of inflation/fees, I wouldn’t call them safe. There are several other funds, and I would recommend diversification which are safe. Long term, pick any 10 contiguous years and the S&P is always in double digits, and there are several funds which perform better then that. If the current market conditions change and stocks go down and the $ & bonds start rising then you might want to look at the other two I mentioned.

Q: WLhy can’t I put my Roth IRA in Tax Free Bonds?
My financial advisor said I can’t put my Roth in Tax free bonds and is recommending Intermediate bond fund of American instead. It pays less than the tax free, even tho I won’t pay taxes on either.

A: Municipal Bonds lose their tax free nature if put in to a retirement account.

Q: Can resident aliens invest in US Municipal Bond Funds? Would they get exempt-interest that is tax free?

A: Yes, since they are residents the same tax laws apply to them as to U.S. citizens.

Q: Can you transfer all the funds in an IRA to a Tax Free Treasury Bond or a Tax Free Municipal Bond?

A: Since the IRA is already generating tax-free income, it generally doesn’t make sense to buy tax-free bonds in the IRA.

Q: Exempt Interest on mutual funds are tax free, but would AMT affect all shareholders?
Does Alternative Minimum Tax change from one individual to other or is it a rate applicable all? How is AMT determined?
Would municipal bond funds decalre exempt interest or reallocate income dividend to exempt intest?
What is foreign tax paid in the Form 1099-INT?

A: Exempt interest mutual funds yield exempt interest and there can be short term cap gain and long term cap gain. The interest is exempt from federal tax and depending on your state law could be exexpt fully in your state or taxable in your state to the extent of interest received on other state bond. The cap gains will be taxable federal, but there generally is not must gain on a fund.
The almin tax rate is either 26 or 28% depending on your income level. Exempt interest can be subject to alt min in the fund ivests in state bonds that are subject to alt min, again there usually is not much of this.
Foreign tax paid on a 1099-INT foreign tax withheld on a foreign bond that paid interest. This tax can be taken as a foreign tax credit on your federal tax return.

Q: Is it better to buy muni bond fund or the bond note itself, assuming the rate of return is the same?
Both are tax free for California and Federal.

A: For individual investors, I would still recommend a fund. If the one bond you invested in defaults (I know this is rare), you may loose much of your investment. If it happens to the fund, the impact on you will be negligable. It’s back to the basics: dirvesify, diversify, diversify. Effective diversification is not practical for most individual investors to do on their own.

Q: Does It make any sense to own Muni( tax free) bonds inside an IRA?
I will be taking a rollover from 401K and funding an IRA. I will immediately be taking distributions from the IRA for living expenses. Is there any reason to own Muni bonds for income inside the IRA as compared to similar rated corporate of treasury bonds of the same duration. I plan to latter due dates between 2 and 15 years.

A: It does if it’s a bond that you have a good reason to invest in *other than* the tax free benefit. Because you will be taxed on the gains coming out of the IRA, you do not get the tax benefit most people invest in Muni’s enjoy.

From an income perspective, your most likely find non Muni’s pay higher interest. They will be taxable but coming out of an IRA (non Roth) everything is, so you might as well get the higher return.

Q: Which is the best way to tighten the labor market and increase wages?
1) Reduce the work week.
2) Lower the retirement age and raise SSI benefits.
3) Raise taxes and interest rates to compel tax free bond purchases to fund public works programs fixing our infrastructure and taking workers out of the market creating scarcity and raising value of labor?
4) All of the above?

A: 1) Enforce illegal hiring laws against employers
2) Kill tax deductions for companies that move their manufacturing to foreign countries.

None of yours will work.

Q: Can you avoid all taxes on income and savings if you make over 200k?
using everything from writeoff, deduction, offshore accounts, tax-free mutual fund, bond, you name it..etc.
say 200k is the income and saving for the year (0 expense)
how much can i possibly save by doing everything possible to avoid tax (legally)
how much would i lose if i do nothing at all and let government tax the 200k?

A: No, you cannot avoid all taxes. You do understand in some circles you are “rich” and Obama wants to adjust the tax rates so you’ll pay more for those who don’t pay any taxes. It’s impossible to answer your last sentence without more information.

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