After making maximum tax deferred 403b contributions, and maximum Roth contributions, I would still like to invest some money with minimal taxes. I have heard there are municipal bonds that can be invested in, and their earnings can be both federal and state income tax free. WRT state income tax, that probably requires the municipal bond is invested in your state of residence (if you live in a state with income tax) My question is does TIAA-CREF offer municipal bonds? If not, how can I decide which firm to use for muni investments?
Radiodude, thanks for starting a discussion thread!
For myself (prior to retirement) after doing the two things (maximum) you mentioned, since we did have a mortgage (from 1984, three decades ago) my next "investment" was to add principal paydown as we were able and as we went along). We have never had a very high income tax bracket so having taxable investment income has not bothered me / us. Personally, for what we get from federal, state and local - services / infrastructure and such - I am happy to pay whatever we are due to pay. Fourth year into our retirement, I am still happy to pay the taxes.
I am NOT familiar with muni investing. I am aware that there are some situations where muni income is treated in a different manner by the IRS, not totally tax-free. Make sure that you understand any tax implications.
As with everything complex that I am not familiar with, I start with a splurge of Google searches and educating myself. Many brokers like Fidelity and Schwab will have information. I even saw that AARP has something to say about muni's but I would read with caution.
I know that when I was new to preferred stock investments I found a web site that provides much reference data on specific preferred stocks like issuer, rate, expiration, calls, etc. After venturing into several individual investments I learned from tough experience that you are exposed with individual securities in specific industries. My experience was with Ford, GMAC, GE. I had to do some back peddling on a few occasions. Also, companies do NOT tell you when they are going to call individual securities which means some apparent capital gains can disappear instantly when they are called. I finally settled on an ETF that follows a know index and have been much happier. There may be parallels in dealing with muni's.
So read, educate, decide on applicability and then monitor, monitor, monitor. GOOD LUCK!!! :-)))
PS: I would certainly like to know in the future what you learn about muni's and how you proceed. I too have wondered about using them.
Municipal bonds (munis) pay interest to you. Some of them pay tax-free interest, which is exempt from income tax. You will not pay income tax on tax-free interest. However, tax-free interest will be added in when you make adjustments to taxable income and itemized deductions. Notably, you add tax-exempt interest to other income when figuring federal tax on Social Security benefits. State and local taxing authorities have their own rules. Any investment broker can purchase munis for you, so just use the broker that you use now; you've already vetted that broker and are comfortable with your working relationship. There are also brokers that specialize in bonds, and may even sub-specialize in munis. You find one of these brokers to work with the way that you would find and evaluate any other. For example, since you are considering T-C, call them and ask them. I think that an important criterion will be the willingness of the broker to educate you on fitting munis into your portfolio. Munis come in several types; they span the risk spectrum from AAA to junk; some have the estate feature; some have the call feature; some are taxable(!); there's more. You can buy individual munis, muni bond funds, unit investment trusts; there's more. There's more, but learning enough to make the right call is not impossible. If you want to find a investment advisor, rather than finding a broker and doing it yourself, you could start here:
Anyone worked with a financial planner?
Finally, if you consider a bond, and the broker or advisor tries to explain how the bond works, but just cannot make it clear to you, walk away. Keep it simple enough to understand.
Muni bonds are pretty variable by the state you live in.
Are you looking at a bond fund or direct purchase of bonds?
I found the direct purchase to be somewhat of a pain and the bond funds have a bit of a monopoly on the market, so its hard to buy desirable bonds.
I do have investments in a bond fund - not through CREF, but you could use CREF as your agent to purchase them.
I have Aqulla Funds UTAHX fund. It has bonds in Utah and other states that are have a reciprocal agreement or no state taxes. The fund pays a low annual dividend (paid monthly, although better than any CD available right now), and any gains in the traded value.
The part the kills me is the upfront load on A class shares. It is extremely high, so it takes a while to recover from the purchase.
My analysis was that if I bought and held for 5 or more years, it would begin to pay back. But if holding for less than 5 years, buying a CD and paying taxes on earnings, and avoiding the load/management fee was just as good.
If you work in an educational and some other types of institutions, you can double your tax-deferred savings by contributing to a 457 account. We used this and found it added substantially to our retirement savings.
This is exactly what I am looking for. Do I understand correctly that if I am already contributing the maximum allowable amount to my 401k or 403b (which was $23k for 2014 and will be $24k for 2015, since I am over 50 yrs old) I can also contribute an additional amount up to $24k to a 457? And that is also pre-taxed money, tax paid later as it is withdrawn? If so the next question is how to get that set up? Does TIAA-CREF do 457 accounts? Does it depend on whether my employer offers it?
You are correct you can max out both a 403 and a 457 - if your employer offers them. We did ours through Tiaa, so yes the offer 457 services. Call your HR/benefits office and find out.
Munis r generally downplayed by investment firms. Why? Because they require 10k per bond and u buy specific bonds. Yes, the interest income is tax exempt...federal only, but if u live in a state without income tax (Fl) they r tax 'free'. It doesn't matter if the bond drops in value because u r income stays the same due to increases in the interest rate=secure and reliable income, tax free in many states. Unlike Bo, who seems to like paying taxes, I don't. Cref doesn't have a mini fund but that is just another good reason to have more than one managed account.
I have been investing in muni bonds for over 20 years. They generate predictable income stream. However, whether they are appropriate investment for one depends one's personal circumstances. Only you can make that determination through research or through a financial adviser.
Be aware that though the interest from the muni bonds is not taxed at federal level, it may be subject to state income tax.
Muni bond interest also counted towards calculating one's medicare premiums.
After checking these various factors, if you determine that the muni bonds are appropriate, first look at this website to get basic information and current prices: www.investinginbonds.com
For actual trading open an account with www.fmsbonds.com. They deal exclusively in Muni bonds.
I have been dealing with them for over 7 years, happy with their service and execution of trades.
I usually buy insured bonds, which gives me an additional layer of protection, but in doing so I give up a few basis points of interest.
If you wish to go mutual fund route, check money.com to get a list of top performing funds.
Hope this helps you a bit.
Excellent specific advice! I even bookmarked several of your web sites since that is what I alluded to but knew not where to find. Thank you, Pal007!
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