Finance Forum with Greg Kurinec
'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 …
