tax-free

How To Choose 529 Investments

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529 college savings investment options

If you don’t already have a 529 plan opened, you should start with the instructions for opening a 529 plan before worrying about which investments you use. Trust me, when I tell you, as a former financial planner, that the biggest drag on saving money for college isn’t choosing the wrong investments, it’s taking too long to get started. No amount of tax advantages will make that up. Most parents overestimate the amount of merit-based scholarships their child can get, and underestimate how much financial aid they may need in the form of loans. Whether you are using education savings accounts, a Coverdell IRA, or a 529 plan, you want to cover as many qualified higher education expenses as you can without loans. The amount you need will be more influenced by need than merit, which means if you have a higher income and higher assets, you are going to pay more. That is just the way the world works right now. The only thing you can really do is deduct all the qualified educational expenses you can from your taxes and pay the rest with tax-free money from 529 accounts and the like. At least then your qualified education …

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Retirement Tax Triangle for Better Retirement Planning

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tax triangle save money in retirement

Financial advisors make their bread and butter from retirement planning. Unless you’re wealthy (or young), chances are that most of your money is in your retirement savings and home equity. That makes your retirement accounts the main interest of most financial advisors, so it’s in their best interest to make it sound complicated. Unfortunately, they are right. There are a bunch of little tricks to good retirement planning. Fortunately, most of them are easy to straighten out, like the tax triangle. Retirement Taxes Welcome to Retirement. Oh, while you’re here, we need to tax those 401(k) withdrawals. All too many new retirees find themselves surprised that withdrawals from their 401k accounts are fully taxable. It’s an easy mistake to make. After all, when you contributed money to your 401k it was tax-free (technically, pre-tax, but same difference). And, while all of that money sat in your 401k earning interest and dividends, it was tax-free. So, why wouldn’t it keep being tax-free? Unfortunately, that’s the deal you make with the IRS. A 401k plan is actually a tax-deferred account. As the name implies, the IRS allows you to defer, or wait, to pay the taxes. It is a huge advantage and …

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Muni Taxes Stay the Same

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The U.S. Supreme Court in a 7-2 decision upheld the central tenant of most state’s municipal bond tax policy, specifically that a state can exempt it’s own muni bonds from taxes while taxing the interest on other state’s muni bonds. So, nothing changes from before. If you live in California, the only way to avoid state tax on bond interest is to buy California Municipal Bonds. If you buy bonds from Texas, they can tax that interest. Taxes and Bonds Because interest on bonds is taxed as ordinary income, avoiding taxes on that interest is more important to investors than avoiding taxes on dividends paid by stocks. Most corporate bonds are taxed at both the federal and state level which reduces the real rate of return to the investor. Municipal bonds issued by states are exempt from federal income tax because one branch of the government cannot tax another branch. Whether or not the state municipal bonds are exempt from state income tax is determined by the laws of the states they are issued in. Most states make their own bonds tax-free as a way to make them more attractive for purchase. This tax-free status, plus the relative safety of …

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