There are several tax-free investment options well worth looking into.Depending on your situation, there are details here to see if any of these three plans are sensible financial options for you: Roth IRA, Municipal Bonds, 529 Plans.
A)You may meet the requirements to set up Roth IRA. The eligibility requirements and tax-free benefits of an IRA are straightforward and worth knowing about.
Your eligibility is based on your Adjusted Gross Income, and whether you file your tax return as a single person or whether you file jointly. Your age enters into the eligibility requirements only by setting limits on your contributions. For example, in 2007, the contribution limits are $4,000 if you are under age 50 and $5,000 if age 50 and over. However, unlike a traditional IRA, , you are still eligible to contribute to a Roth IRA if you are age 70 1/2 or older and you have earned income.
Your Adjusted Gross Income or AGI determines your eligibility to contribute to a Roth IRA. The AGI ceiling is linked to whether you file singly or jointly.
Filing a single tax return? You are eligible to make a full Roth contribution if you AGI is less than $99,000.If your AGI is between $99,000 and $114,000, you can put a portion (with a gradual decline) of your contribution into a Roth IRA and the remainder into a traditional IRA account.
Filing jointly? Your AGI would need to be less than $156,000 for 2007. You can make a partial contribution as a joint filer if your AGI is less than $166,000 for 2007.
With a Roth IRA, your earnings grow tax-free.
Although your contributions to a Roth IRA,are not tax-deductible, the contributions can be withdrawn at any time under certain conditions without penalty or tax. Earnings are free from federal tax if they are withdrawn after age 59 and the account has been open for more tan 5 years.
Many people make contributions to their Roth IRA to help reach their retirement goals. Consider opening a Roth IRA and see your savings grow tax free whie you enjoy the peace of mind of knowing that you are preparing for your future.
Any money you put into a Roth IRA grows absolutely tax free.
B) Municipal bonds are tax exempt
A city, county, or state governments issues municipal bonds for major building major projects for their locality such as schools, highways, hospitals, and other projects. Investors like buying Municipal Bonds because of their tax advantages.
Municipal bonds look good to the investor because these municipal bonds are tax exempt when it comes to federal taxes and can be free of state taxes if bought in the investor’s own state (But don’t miss Tip #2 Below!). Such municipal bonds may even be tax exempt when it comes to personal property tax. Certainly, if you live in a high tax state, such an investment will be particularly advantageous.
Tax advantages are just one reason for taking a closer look at municipal bonds.Investors may be drawn to municipal bonds because of the relative safety of this kind of investment. Interestingly, investors may also be interested in the projects being financed for personal reasons or because those improved roads or schools may indirectly benefit their other business interests.
Just like with any investment, there are some basics that are important.
There are two categories of municipal bonds, both based on the type of collateral that is used to establish them. These two types are General Obligation bonds and Revenue Bonds. General Obligation bonds, with the appealing nickname of GO Bonds, are backed by the fact that city, county, or state has the advantage of being able to raise revenue through taxes.
Revenue municipal bonds are offered by an entity of the the city, county, or state government level. A utility company such as a water company is a good example of such a revenue municipal bond. That utility, that business, has an obligation to pay the interest and does so from the revenues that come in from the business. In this case, the income is generated as customers pay their water bills. The bond holders are paid from this revenue.
You will need to know how these tax free municipal bonds compare to other bond investments you may be looking at? There is a way to compare them. You will want to get the greatest after-tax return. The taxable equivalent yield formula will help you see which may be the best for you.
To calculate this information, you will need to know about Yield and will need to know your tax bracket (as a percent).
USING THE FORMULA-
What is the YIELD of the tax-free municipal bond you are considering? For our formula, let’s say it’s 5%.
What is your tax bracket? As an example if it is 15%, you calculate 1 – .15 = .85. We are going to use the .85 in our formula.
Next: Our YIELD divided by our .85 (representative of the 15% tax bracket), gives us:
.05 divided by .85 equals is 0.0588, which is 5.88%. If you can invest in a taxable bond with a YIELD better than this 5.88%, you should pursue that taxable bond. These numbers are used to illustrate how this formula works. Your prospective municipal bond may present a different yield and your tax bracket may be higher or lower than the 15% example used here. Do the math, as they say, and use the quotient of this basic division formula as a measure of whether you can do better elsewhere. Typically, investors in higher tax brackets do better in tax-free municipal bonds.
TIPS and OTHER POTENTIAL BENEFITS OF INVESTING IN MUNICIPAL BONDS:
1.Get information about the bonds offered: a.) Who will be servicing the interest payments on the bonds, and b.) What is the economic health of the issuing city, county or state. Factors contributing to good economic health are whether the state or local government, as a community, is prospering and growing, has diversity, can show a solid payment history on prior financial responsibilities, and currently has a population of at least 10,000 residents.
2. Look at neighboring states, cities, or counties. Perhaps a neighboring state, city, or county has developed reciprocity agreements. Such a reciprocity agreement may make bonds from these neighboring jurisdictions available on a tax-exempt basis as well.
3. Consider fluctuating interest rates. Changes in interest rates affect municipal bonds. If the current interest rates go down, investors will benefit by an increase in the value of their bonds. The reverse is also true, so factor that possibility into your decision.
Municipal bonds deserve a closer look if your are considering making a wise investments. Their tax-exempt status, their relative safety, and their contribution to your state or municipality are all solid advantages of why you should look at investing in municipal bonds.
Bond investors have an escape not available to stock owners. They can buy municipal bonds and pay no federal taxes at all on the interest. And if you buy muni bonds from in-state issuers, you can avoid state and local taxes as well.
C)529 college-savings plan. The sooner your money is in an account, the sooner it starts to earn tax-free returns. 31 states plus the District of Columbia offer residents a tax deduction or credit for contributing to their state’s own 529 plan. Kansas, Maine and Pennsylvania let residents take the deduction for out-of-state 529s as well. Investing a sizable portion of your college savings in a 529 plan makes good financial sense. You can get started with a minimal investment.
Roth IRAs, Municipal Bonds, and 529 Plans are all excellent tax-free investment options that deserve a closer look. Even if you have looked into them in the past, take another look, as they laws and criteria change and now may be the time for you to move forward on one of these options.