Can you answer Ryan’s question about Bonds?:

My father recently passed away and he had $40,000 worth of savings bonds that he had purchased back in 1992. I am listed as the POD (Payable on Death) on them. Can I use these for education for myself? I would like to go back to school and it would be great if I could use these tax-free.

Unclaimed Premium Bonds

Saving money for our children’s higher education is a little like walking through a mine field, which plan best suites our needs. President Bush has just signed the Pension Protection Act, the act outlines strengthening the financing rules for defined benefit plans. The main problem I found with this act is that the Pension Protection Act eliminates the 2010 sunset provision for tax-free withdrawals from the Section 529 tuition savings plan.

This plan was created in 1996 and it allows after-tax income (which means it will not be taxed there after) to be invested in state-sponsored plans and to grow free of federal and state taxes. Fortunately, the Economic Growth and Reconciliation Act of 2001 states that as long as the 529 money is used for college expenses that income earned can be withdrawn free of federal and state taxes. But the tax-free withdrawals are set to expire at the end of the year 2010. If and when that happens the distributions from the plan are taxable, albeit at the student rate.

Most experts are now saying that more 529 options only represent more ways to make the same mistake of investing in these plans. Your investments are locked into specific rules just for a tax benefit and the plan is completely lacking in flexibility. The Coverdell Education Savings Account is another alternative to Section 529. Both plans are similar in that they allow money to grow tax deferred. The Coverdell Education Savings Account may also be put towards primary and secondary education.

If your children qualify for financial aid and you want to use the 529 plans then put it in your name. You really don’t want the plan to be considered your child’s assets when financial aid calculates an aid package. For those high-income parents who probably won’t qualify for financial aid, it would make sense to place the Section 529 under you child’s name to take advantage of the lower tax rate.

Experts recommend purchasing a Series I United States savings bond with the child’s name on it. It can be used for higher education and the interest income is exempt from federal income taxes. Another option for a high-income family is custodial accounts - Uniform Transfers to Minors Account (U.T.M.A.) or Uniform Gifts to Minors’ Accounts (U.G.M.A.). These accounts are a way to shift assets to your children. You could also set up a complex trust which would include restrictions so that once the child turns 18 they would not be able to spend all the money on a car or sound system.



Thanks to Carl Hampton for contributing this article to our Bonds blog:

High Yield Corporate Bonds

For many investors buying leaseback property in France the key attractions are the guaranteed yields, stable economy, low deposits and low interest rates. For most leasebacks though even if you managed to get 100% finance for the ex VAT price you still have had to find the VAT as your deposit which you do not get back until 3-6 months after completion. This can often slow down an investor’s momentum as they are waiting to receive back the VAT before using that money as the deposit for their next investment. Because off-plan properties are usually released for sale 18 months to 2 years before completion you could be waiting over 2 years to get your VAT deposit back.

The next thing people often have trouble with is finding 100% interest only mortgages as up till now really only 80% has been possible. Investors often like the idea of interest only mortgages as it reduces their monthly mortgage payments and therefore improves their cash-flow. However interest rates for interest only products have up till now been rather uncompetitive with the classic “interest and capital” mortgage interest rates which have put people off taking them.

The third thing that for some investors has prevented them from taking the plunge and investing in France is that they have felt the yields are not high enough on leasebacks which have usually been around 4-5% NET (equivalent to around 6-7% gross). Even though they are guaranteed and paid NET some investors prefer to take the gamble and purchase something in the emerging markets that they “think” will have a higher rental return.

These issues have now been overcome and you can now get the ultimate leaseback investment. Let’s take an example of one to three bedroom apartments from 106,917 Euros in a stunning high quality residence at Mers Les Bains, Picardy, just 300m from the sea and right in the town centre, walking distance from all amenities. The guaranteed NET yield is 5.27% and you can secure 100% interest only finance (subject to status) at a fixed rate of just 5.1% (correct at time of writing).

What this means is that you can invest in and excellent location in France that pays for itself and all you need to find are your bank and mortgage setup fees plus your legal fees (notaire fees). If you add all these together they add up to roughly 7% of the property price. For better understanding we have provided a simulation below of an investment in a 1 bedroom apartment:

Property Price: 106,917 Euros

VAT@ 19.6%: 20,956 Euros

Mortgage: 106,917 Euros

Deposit: 0 Euros

Notaire fees: 5115 Euros

Bank & mortgage fees:2302 Euros

TOTAL personal contribution: 7,417 Euros

This is just one of the highly attractive investments currently available in France and with the new French tax reforms great things are expected for French property in the coming years.



Thanks to Nick Dowlatshahi for contributing this article to our Bonds blog:

Us Savings Bond Interest

There may have been more than one occasion when you might have had to borrow money from a friend: at the coffee shop, in the office, or even for the cab service. When you run out of money, borrowing is usually your only way out. Juxtaposing the same with big corporations and the federal government, one would find it is not that easy for them. Not only have they to repay the money owed, but to top that amount with interest. That is why companies are made to sign a bond by law, promising the repayment of the money owed. It is a formal kind of security to ensure due payment.

However, certain criteria ought to be considered before investing in a bond. Let us take a short tour through how investing in a bond could benefit you.

Before Investing

The working of a bond primarily depends on whether you need to invest money for a long or short term. Besides, it also depends on your tax status, the period and investment goals. There are some basic strategies on hand, which should be considered before making any investments. For instance, putting all your assets and risks in one single asset class would not be a good idea. It is better to diversify the risks by creating a portfolio of several bonds within the bond. By choosing different issuer’s bonds, you could protect yourself from the possibility that one of the issuer’s may not be able to pay back the amount owed.

After Investing

After investing, a par value, or the amount of money the investor receives after maturity of the bond, is calculated. This means the amount (principal) owed should be returned to the investor. The coupon rate is the amount received by the bondholder as the percentage of the par value. Lastly, a maturity date is arrived at wherein the bond issuer needs to return the principal amount to the lender.

To arrive at how much a bond would yield, one could divide the amount of interest paid over the course of a year by the current price of the bond. Prices of bonds fluctuate; hence, the current price is always taken into consideration. However, if you decide to sell before the maturity date, it is advisable to do it at the current rate of the market.

Types of bonds

There are different types of bonds available. For example, government, corporate, agency, mortgage-backed securities, municipal, etc. In addition, different maturity level bonds are also available; these help in managing the interest rate risk.

The treasury bonds available from the US government have maturity dates ranging from 3 to 5 months to thirty years.

Corporate bonds, on the other hand, which are sold through public security markets, are a little risky and have high interest rates.

Local and state government bonds have higher interest rates, as unlike the federal government, there are more chances of them going bankrupt.

Foreign bonds are difficult to buy, and is mostly done as a part of a mutual fund. However, investing in them can turn out to be risky.

To conclude, even though certain bonds may be risky, or offer a lower rate of interest, buying bonds are a safe option, as they are sound investments. Securing a number of bonds gives the owner a good credit rating and helps to prove his or her financial stability.



Thanks to Joseph Kenny for contributing this article to our Bonds blog:

Unclaimed Premium Bonds

Can you answer Ambernc1’s question about Bonds?:

We are looking to transfer the money in our savings account to a high yield savings account or even possibly a CD. The bank I am currently with only offers a 0.2% return on savings and a 1.2% return on a 3 month CD. Does anyone know of a bank in the US (Arizona) that has a higher interest rate? I was looking for around 3%.

Tax Free Municipal Bonds