Your Questions About How To Invest In Bonds

Steven asks…

How are municipal bonds taxed?

My wife and I are thinking about putting a percentage of our traditional IRA funds into bonds (to introduce a little more stability). I’m concerned though that the we’ll be taxed on bond investments now even though we have a traditional IRA account. Can someone please elaborate on the tax situation here? I’ve heard that municipal bonds may be better if bought from the same state we live in.

Ideally, I’d like to invest in bonds but would like the investment to remain tax-deferred (just like the other stuff in our traditional IRA).

John answers:

The interest paid on muni bonds are not subject to federal income tax and are not subject to state income tax from the state they are issued from so if you want to buy munis, buy local. Yes they are tax free but their is a built in tax in the form of a lower yield. If your marginal tax rate is 25%, a taxable bond yielding 4% is the same as a muni yielding 3%. If you sold one for a profit, that would be subject to tax at capital gains rate.

Richard asks…

Is now a good time to invest in TIPs bonds?

I’m looking at investing in a TIPs mutual fund, and was a little confused about it. Bonds are expected to decrease because of rising interest rates, but inflation is expected to increase making TIPs more attractive. How do these factors affect TIPS bonds? More specifically, I’m looking at mutual fund ticker VIPSX.


John answers:

What’s your investing time horizon? If you expect higher inflation in the future, that’s the only reason to invest in TIPS.

ALL bonds are adversely affected by rising interest rates – the longer the term (maturity), the greater the sensitivity.

William asks…

how much money is invested in bonds and how much money is invested in certificates of deposit?

Susan purchased municipal bonds yielding 10% annually and certificates of deposit yielding 13% annually. If Susan’s investments amounted to $12,868 and the annual income is $1604.23. how much money is invested in bonds and how much money is invested in certificates of deposit?

John answers:

Let X= bonds
Let Y=CD

X + Y = 12,868

X * 0.10 + Y * 0.13 = 1604.23

Solve the simultaneous equations for X and Y.

Mark asks…

How should I invest in bonds?

My mother asked me for my help in investing her money, since I am in business school. However, I am only an accounting major, so a vast understanding of the market is something I do not possess, much less care for. She is approximately 50 yrs old, and just separated from her husband. She has asked me to help her set up an investment, in which she can just live off of the money she can make, and I automatically assumed bonds. I know bonds have a minimal ROI, but she does not need thousands of dollars a month to live, only the necessities (house, taxes, bills, etc. are all prepaid and taken care of), she only needs “leisure” money and grocery money, stuff like that. I have thought about investing in municipal bonds, mainly because they are tax free, and while they do have a low interest rate, they are of the safest investments, and we are not looking to “hit it big”. However, I was also thinking about diversifying, also looking into high-risk, high-yield bonds. I figured that this way, we have the municipal money as a safety net, and this money could serve as an extra source of high income (it is also for me to “play” around with a bit). So my question is, does this sound like a god idea, or is there somewhere that I can get more information on bonds and do this right?

John answers:

The best advice you can give her is to tell her to speak to her bank manager. He will refer her to an investment advisor on staff or will refer her to a financial planning company that he knows and trusts. The interest she will make from investing in bonds is minimal and the income taxes cut down the amount even further. At her age, 50, she does need to have at least 50% in safe investments. However, an advisor can make suggestions about investments that are safe but have better return.

When looking for an advisor, check the credentials. You do not want to give your money to an investment representative who simply represents many financial choices but does not have the licensing, education or skills and is concerned only about the commission he is paid. Look for a reputable advisor with the education and reputation to do a good job. If her bank manager cannot help her, ask some of her friends for recommendations. Do not buy products from an advisor who only sells funds from his company.

If you insist on helping her, suggest mutual funds that hold bonds as well as equities. The bonds will help to keep the returns at a steady level while the equities will provide growth. There are many growth and income funds available to choose from. These can be purchased online or from an advisor. Take a look at the attached for some articles about mutual funds.

Robert asks…

if the whole fund from sale is to be invested in bonds or the capital gain calculated is to invest in bonds?

if some funds from sales is 6 lakhs. and capital gain calculated after deducting exemption etc comes out to be 240000. then for bonds if the whole amt of 6 lakhs or the capital gaIN calculated 240000 is to be invested ? and if the interest paid is agian liablr for tax and how it is paid like quatery yeary or after maturity.
i mean to say the the whole sale amount plot or the capital gain calulated to be invested in bond. eg sale amount is 6 lakhs capital gain 240000.

John answers:

Capital gains portion is enough.

But which fund ??. If you can tell details, then we can calculate correctly and advise you.

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