Tax Free Investments
Tax free investments are generally limited to municipal bonds. These can be excellent investments as you can control your risk with relative certainty. In addition, the tax savings of tax free investments are generally higher than you may realize. When you combine the safety of most municipal bonds and the tax savings, every investor with a diversified portfolio should consider individual bonds or municipal bond mutual funds.
The other benefits of having municipal bonds are they do not interfere with your total overall income. If you want to add income, but do not want to move into a new tax bracket, this may be the perfect investment for you. This savings alone can add quite a bit to your true yield.
If you are a passive investor, there are many tax free investments that come in the form of mutual funds. You can choose your risk level and allow the fund managers to make the decisions for you. This is much easier if you do not know how to look up credit histories and get a real good idea about how risky any given investment is.
Governments default on bonds as the absolute last resort. If they do it severely limits their ability to raise money in the future for infrastructure projects or emergency help during a disaster. Governments will not pay their vendors and on occasion even their employees before they default a nickel on their municipal bonds. Simply, they know if they default it is basically game over and they run the risk of having their town taken over by the state or federal government.
Investing Tax Free Yield
If you are interested in investing tax free, you should certainly know how to calculate the true yield of this type of investment.
The equation is rather simply, you simply divide your yield by (100 – your tax rate). This gets you the equivalent yield you would need from a taxable investment to break even. In other words, if you are comparing tax free investments with a taxable investment, you should compute the true yield of the tax free option, and then choose whichever investment has the highest yield.
Tax Free Investment Example
Let’s say you are in a 25% tax bracket and your municipal bond has a 7% yield. In this example, you would dive your municipal bond yield of 7 by 100-25 = 9.33% true yield when you compare it to a taxable investment. Thus if your taxable investment has a yield of 8%, you will definitely want to go with the tax free investments.
As you can see if you do your research or invest in mutual funds with good ratings, tax free investments are an excellent addition to most portfolios.
Investing Tax Free Safety
By purchasing municipal bonds from highly rated municipalities or governments, you are also taking a big step towards protecting your money. This is why it is a favorite investment option for people that are at or are nearing retirement. When you reach a certain point, your main focus shifts from growing your money to protecting what you already have. The tax free investments are kind of the best of both worlds as you can keep your money in a fairly safe investment and still receive a fair return on your money when you factor in the tax savings.
Investing Tax Free Other Benefits
When you purchase municipal bonds you are investing in American communities and making the country a nicer place to be. These bonds are usually issued to help pay for roads, schools, community centers, and municipal buildings. All of these things are an investment into the future of our country. This is one of the rare opportunities where you can receive a good return, help your community, and help the country by using completely tax free investments.