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'Go To' Greg: Tax Free Investments and Market Risk

A discussion on tax free vs. taxable investments as well as market risk

Dear Greg,

My brother and I were hoping you could solve a long-running disagreement we have had. The question is simply: “Is a tax free investment better than a taxable investment?” Please help set the record straight.

Terry G.

Dear Terry,

I think my answer is simple one so here it is: "It depends.”

It depends on what tax bracket you are in. Let me walk you through a short example.

Let's assume two investors are both paying a 20 percent marginal tax rate.

Mr. Tax Free Municipal Bond earns 4.5 percent tax-free. Mr. Taxable earns 7 percent but must pay 20 percent of his return back in the form of income tax.

Mr. Taxable earns (7 percent) x (.80 the amount he gets to keep) or 5.6 percent. Even though Mr. Taxable pays tax he still has more money at the end of every year.

Always judge an investment based on its after tax rate of return.

I hope this will allow you and your brother to resolve this issue once and for all.

Regards,

Greg

Dear Greg,

My husband is a risk taker and loves the stock market. I am afraid of it. My father always said, “Don’t invest in the stock market what you can not afford to lose.”

The money we are investing now is for our retirement. We have worked hard but cannot afford to lose it. Can you suggest a happy medium? Any help is appreciated.

Bill and Judy G.

Dear Bill and Judy,

Your situation is all too common. I have found that a lot of what attracts us to a person (risk takers, rebels, conservatives, etc.) is what we also say drives us crazy about that person.

That being said it does not solve your problem. Here is what I suggest. First start with asking the question, “What am I really investing this money for?”

If the goal is current income and preservation of capital then I would take a more conservative approach. If your goal is to leave as much as possible for future generations then maybe a more aggressive approach is warranted.

Either way you need to communicate more and learn more about why Bill wants to invest this way. Maybe he can explain why some of these “risky” investments look so good. His explanation might make you sleep better.

All the best,

Greg

Do you have a question about anything related to Finances? You may mail, email or fax your questions. Here’s how to contact Greg;  gkurinec@bentron.com' Fax: 630-505-8376; Phone: 630-505-8375; Mail: 1833 Centre Point Circle, Suite 135, Naperville, IL 60563.

Greg Kurinec is a well-known Chicago-area financial educator who specializes in helping people prepare for retirement. Greg is a Certified Estate Advisor with the National Association of Financial and Estate Planning. Greg is a graduate of Purdue University where he earned his degree in Financial Planning and Counseling from the school of Consumer and Family Sciences. He works at Bentron Financial Group, Inc., a firm dedicated to helping people that are at or near retirement with offices in Naperville and Oak Park. Feel free to contact Greg with any estate planning or investment advisory needs.

Greg is a Registered Representative offering securities and advisory services through Independent Financial Group, LLC, a registered broker-dealer and investment advisor. Member FINRA and SIPC. Bentron Financial Group, Inc. is not affiliated with Independent Financial Group, LLC. OSJ: 1755 Park St., Suite 200, Naperville, IL 60563 This communicate is intended for individuals residing in Illinois. The contents of this website do not constitute a solicitation to purchase or sell securities in other states. No offers may be made or accepted from any resident outside the specific states referenced. This is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Information has been obtained from sources believed to be reliable but its accuracy is not guaranteed. The material has been prepared or distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

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