SEASIDE - In our last article we discussed using tax-exempt municipal bonds as a way to reduce the tax burden on intermediate term non-retirement savings. As a reminder, municipal bonds are debt securities issued by state and local governments, with interest that is exempt from federal taxation and, for persons living in the local area of issue, may be non-taxable at the state level.
Today we will discuss another tax efficient alternative for your short term savings.
When a high degree of liquidity is needed, tax-free money market funds provide earnings that are not taxable. A wide range of securities are available for these funds, which are typically invested in short term notes of local and state governments.
The goal of money market funds is to preserve the value at $1.00 per share but that value is not guaranteed or insured by the Federal Deposit Insurance Corporation (FDIC) so it is important to review the fund carefully before investing.
The tax benefits of municipal bonds and tax-free money market funds favor those in higher tax brackets. To decide if these types of investments are appropriate for you, it is necessary to compare the tax-exempt or tax-free yield to the after tax yield of comparable taxable investments.
As an example, a taxable investment needs to yield 6.94% to compare to a 5% municipal or tax-free investment when in the 28% marginal income tax bracket. For a 35% marginal tax bracket, a taxable yield of 7.69% is essential.
Remember, tax-exempt income is included in calculating the taxability of Social Security income. Consult with your tax consultant and investment advisor if you want to know more about using tax-exempt securities to reduce your taxable income.
Teresa Brown is a Registered Representative of INVEST Financial Corporation (INVEST), member FINRA, SIPC. INVEST is not affiliated with TMB Financial, LLC. Securities, advisory services and insurance products are offered through INVEST and affiliated insurance agencies. INVEST does not offer tax advice. May be subject to the federal alternative minimum tax. Teresa Brown can be reached at (503) 861-9402.