Beginner taxable bonds verses municipal bonds question?
March 23, 2009 by How Savings Bonds Work
Filed under More Bonds Answers
Can you answer krayz’s question about Bonds?:
A married couple currently has $300,000 invested in taxable bonds, which pay 6% interest annually. They project 2008 taxable income (including $18,000 taxable interest) to be $90,000. Opportunity to buy municipal bonds at 4.25%. Should they sell the taxable bonds and invest the proceeds in municipal bonds?
Would the answer change if taxable income for 2008 rose to $150,000 or $250,000?
I think i’m supposed to compare the after tax basis at the income levels but i’m not sure how to go about that.
A married couple currently has $300,000 invested in taxable bonds, which pay 6% interest annually. They project 2008 taxable income (including $18,000 taxable interest) to be $90,000. Opportunity to buy municipal bonds at 4.25%. Should they sell the taxable bonds and invest the proceeds in municipal bonds?
Would the answer change if taxable income for 2008 rose to $150,000 or $250,000?
I think i’m supposed to compare the after tax basis at the income levels but i’m not sure how to go about that.
Bonds Feedback: I think the top individual dividend tax rate is 15%, so .06*(1-.15)=.051 or 5.1% on the taxable bond after taxes… so I beleive they’re better off sticking with the Taxable bonds.
The answer wouldn’t change if their taxable income increased because I’m using the top dividend tax rate already.
At what tax rate would it be more beneficial to take the muni bond?
.06-.0425=.0175
.0175/.06=29.16% (rounded)