tax exempt, low risk, no AMT investment

gibby2015April 3, 2007

Due to some unique circumstances I had the good fortunte of being in a higher tax bracket last year - and will be this year - and possibly the next two years. The good fortune also means I have quite a bit of cash in an interest bearing account that my accountant has advised me to do something about since it's being taxed at such a high rate. I'm also in a state that is about to vote in the highest state income tax rate in the US - and unlike some of the other states in this category we also have hefty sales tax along with just about every other tax anyone could possibly dream up.

Anyway, I know I need to do something else with some of this money but I'm seriously risk averse about this particular cash. I'm all for risk with my retirement investments which I don't plan to use for 15-20 years. However this other money I may want to use sometime in the next few years. Might do some home improvements, might decide I can't stand my job any more and quit, might have unexpected unemployment, etc. I like the peace of mind of having this liquid reserve. I also do not like the idea of investing it in something riskier and longer term - and incurring debt in the event I want to use this cash and the investment is in the tank. I have very little debt and I don't want any more even if that is somehow a better thing to do.

So the tax guy suggests several options most of which I've ruled out for various reasons - some just not available to me like a Roth 401K. The one option I was most in favor of was some type of tax exempt bond type investment - he also specified identifying one that is not subject to AMT (which I also had the good fortune to qualify for this year).

I'm about to consult a person I know who is a CFA who I may start working with - since I've so far not used any kind of financial advisor. However before I plunge into that I thought I'd see if there's an easy answer to this question. What say you?

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I think he's right on a tax free municipal bond. Some are free from Federal tax, but subject to state taxes, some are exempt from both State and Federal taxes. I am not familiar with the ones exempt from AMT, but they might exist.
The ones that I have owned were triple A rated and backed by major insurance companies. Very low risk.
Like other investments, if you want a higher rate, you will have to go with a bond that isn't rated quite so other words riskier.
You can sell these at any time, but the value will fluctuate and so it's possible to have to sell for less than you paid for them.
The last time I checked the rates were so low that there was no big incentive to get back into them. I could earn money and pay taxes and do nearly as well as the tax free bonds.
if you have much cash to fool with you probably should get professional advice. I just like to avoid people who give advice and also sell a product. And if you have someone managing your money rather than just giving advice, they will be taking 1 or 2% of your investment so you probably won't gain much.

    Bookmark   April 3, 2007 at 11:13PM
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I agree with Cool, especially hate the idea of paying a percentage to anyone

If you find something like you described please post about it. I had a bad experience with a bond fund that fluctuated a few years ago and was down when DH decided to sell(he should not have signed for it in the first place, I had told him to do a money market because it was our slush fund.

Right now so many banks are offering close to 6 percent that for me there is no reason to risk fluctuation

    Bookmark   April 4, 2007 at 2:39AM
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You guys are too funny. You both stated several things that are exactly what I think. I don't like paying a % to anyone - I'm always unclear if I'm really going to be better off and I don't trust that the person telling me I will be is actually objective. The guy I am considering charges less than 1% so I guess that's good. And anytime I've considered tax exempt things, it did seem like I was going to break even and not worth the trouble. Hmmmm...more food for thought.

    Bookmark   April 4, 2007 at 8:58AM
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It sounds like what you want is someone to give you financial advice. I really don't know the different designations of these advice givers, but I do know that some are salesmen and make their living from commissions. So, you can be very sure that they are going to recommend something that they benefit from. There are also advisers that you pay by the hour. This might be what you want. I'm guessing a decent one will cost you $150-$200 per hour. So, I think you have to decide the amount of money you are playing with and whether it's worth it for you.
One thing that is free is talking with a securities or stock broker. Any available and existing tax free bonds are available through all brokerage offices. I think newly introduced bonds might be offered only through sponsoring brokers (not sure).
These brokers won't necessarily know what your tax picture is, but can tell you the return on a tax free compared to a taxable income. They will usually say something like, "It returns 2.8% which is equal to 3.9% in taxable income. You have to remember that they are normally doing a comparison with income being taxed at the highest rate. You also have to ask if their comparison considers State Taxes and for what State. Also ask about any that are free from the AMT.
You should be able to do this on the telephone. Ask a friend if they can recommend a broker to you. This information is all free.
There were some 30 day tax frees in my State a few months back. So, can get some that turn over quickly with no risk of loss of principal.
If you have much money involved, it might be worth it to spend a few hundred and talk with a good financial adviser. At the same time you might discuss your financial planning for the future.

    Bookmark   April 4, 2007 at 9:25AM
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NEVER forget! The only thing between a financial advisor and his home mortgage is YOU! All you are is a commission and they've got dollar signs for eyeballs. NEVER forget it!

Do some research, get a couple books, study em, keep em, refer to em lots.

Here's a good site to study muni bond stratagy:

I don't deal with these people (big argument) but there is good info on this site.
In the mean time there is no hurry on muni's as the yields are down now. Like 3.5%

Short term treasuries are doing the best: 4 week bills are abut 5%. You can manage treasuries yourself with NO broker and NO fees on the Treasury Direct site:

In Ca the treasuries (bills, notes, bonds) are not taxed. See if this is true in MN. If so that can mean an effective increase in yield.

In general you pay no fed or state tax on a muni issued within your home state. You pay a state tax on a muni issued outside your home state. There are, however, taxable munis, I have a couple. There are also various type of munis with various risk factors. Insured are safest. General obligation are safter. Revenue bonds aren't the safest even if insured etc etxc etc. Gotta study.

I prefer to buy bonds on-line all by myself with no other human involved because: There are 20 things I look at for each bond and if you talkt to even 1 human you will either miss something or play 20 questions and finally give up. To this end I have found Etrade Bond page one of the best because they indicate all 20 things like if the bond is subject to AMT or insured or callable plus stating yield to call, yield to maturity, yield to worst etc etc. As you can see there's lots to learn and you better learn it.

Also remember: Money in a savings account may be getting 1/2% per year. Even a 4% yield on a moldy muni is 8 times more yield.

Finally don't just look at the tax you might pay; look at the net after tax. You can do this yourself by plugging various scenarios into a tax program and comparing the answers.

For example; yesterday I did just that. I plugged in an extra $2000 ordinary interest income for 2007 and my taxable income went up 3700. How? Well more of my Social Security got taxed. Not so fine huh? But! The tax only went up 370 so the fallout was that my net after tax went up $3330. Conclusion: I can use more taxable income for 2007.

Did your accountant do something like this?

    Bookmark   April 4, 2007 at 11:16AM
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Excellent advice, especially from Mxyplx.

In a similar situation I divided the money between some Vanguard funds: tax free muni and the ever ancient, ever stable Wellington fund. Returns on the mini fund have been mini however....

I like the idea of buying Treasuries direct. You could ladder treasury bills if the bond time frame is too long.

I was kind of expecing Dave to weigh in on annuity type products where you create a shell and can hold equities tax deferred. I have very mixed feelings about those vehicles myself, as a shift in tax laws a decade ago made a mess of a similar vehicle for me back then.

Good luck and keep us posted.

PS/OT I posted a sleep article reference on a new sleep thread on kitchen conversations. Check it out if you haven't yet.

    Bookmark   April 4, 2007 at 12:30PM
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"If you have much money involved, it might be worth it to spend a few hundred and talk with a good financial adviser. At the same time you might discuss your financial planning for the future"

What is considered much money these days?

Also I think we need to take into account special circumstances like no earned income, SS payouts which not everyone gets and as someone suggested various state tax issues

I just feel like with money at certain banks earning 6% until May1, 5% after, why swtich it

    Bookmark   April 4, 2007 at 2:12PM
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Well, "much money" is different amounts to different people. The people that I consider rich have net assets of over 50M. But by "much money" I meant enough tax at stake to justify spending $200-$300 for advice. If someone has $5,000 to invest, the interest and tax at stake might not be enough to justify the expense. I think the amount has to be judged by the individual. It doesn't make sense to spend $300 for advice that will save $200 in taxes.
Hey, read these forums. People are buying $300,000 houses with advice from no one. Wonder why some are in trouble?

    Bookmark   April 4, 2007 at 8:37PM
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cooltv - it would certainly be worthwhile for me to spend a few hundred bucks to talk to someone. Who the someone is is the question. I probably need to talk to the person I have in mind and see if I can hire him by the hour rather than turning money over to him and then being charged a percentage. I just don't think I need/want that kind of arrangement.

    Bookmark   April 4, 2007 at 9:54PM
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You might have some luck, but if he's used to working on commission, he might not do it or still try to talk you into one of his products. Ask you accountant for the name of someone who is a financial advisor, but doesn't sell anything and doesn't manage funds. There is a name for the trade, but I don't remember what it is. Accountants normally know the different people and should be able to recommend someone.

    Bookmark   April 5, 2007 at 12:02AM
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At this site:

you can read:

"Ten Things Your Broker Won't Tell You About Bonds"

1. My commissions are top secret.
2. I get paid to dump my inventory into your account.
3. Your long-term investment may be short-lived.
4. You don't need this government bond fund I'm selling you.
5. Warning: This ''low risk'' bond fund can be hazardous to your wealth.
6. Your tax-free municipal bonds may be taxable...
7. ...and, um, so may be your tax-free muni funds.
8. Your high-yield fund is full of foreign junk.
9. You're buying the wrong Treasury bond.

  1. The rating agencies need to brush up on their ABCs.
    Bookmark   April 5, 2007 at 3:37PM
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coolvt - this guy I'm considering is a referral from my accountant. He's a CFA and from my conversations, he is the type of person you are thinking of. He's a highly trained and experienced financial analyst registered directly with the SEC or something like that. He's not the typical financial advisor salesperson type. He owns the business and he gets paid via the percentage he charges his clients - which is well under 1%.

My only reluctance to deal with this guy is that this is his own business, it's just a few years old, and I kind of know him personally. DH has to get over the idea of divulging all your financial info to someone you know.

    Bookmark   April 5, 2007 at 7:29PM
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I might find someone else, I honestly would not make DH get over it, sort of like using a doctor you know. Some people have no trouble having him over for dinner after, to me no way! I think if you do not want to pay a percentage, this guy is not the one for you. As for being an SEC registered Investment Advisor under I think the 40 Act, BFD not. I think anyone with a Series 7 who pays the 200 bucks or whatever the fee is now can do it. It is not a sign of anything although there is nothing wrong with being registered either it is a neutral (for example you never want to use a Pesticide registered with the EPA, that actually means it is toxic for example).

Either ask your accountant for someone else or ask around a little more in general. BTW, I always think when professionals refer you they are getting something out of it, either directly or indirectly or are making the recommendation because that is all they know. Talk to some people you perceieve as successful investors that you actually know are successful

    Bookmark   April 7, 2007 at 2:06AM
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I have made one decision about this. One of the things that causes me inertia about doing something different with this cash is that I might want to spend it on some home maintenance/improvement projects. We just don't do alot of things like that until we save the money. And then once I've accumulated it I for some reason have a hard time parting with it. I think because I grew up with not much - I always feel like I better keep it because I might need it for an emergency.

Well, I finally had a little talk with myself and said self, you can and should go ahead with a few of these projects. It's weird - I'm almost fifty years old and there are some things I've never done that my friends have done multiple times over - like re-doing horribly neglected landscaping for example. I had to tell myself that - you're fifty years old - you need to do something with your landscaping - you can afford to do this - just do it.

So I'm meeting with some people, getting estimates and getting some stuff done. I'll see what's left after that. Maybe it will just be enough for my emergency fund and I'll just leave it where it is.

    Bookmark   April 15, 2007 at 4:40PM
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Perhaps landscaping was never that important to you! I am sure the neighbors assume we have no money based on certain deferred maintanence that we have not done. I did not grow up poor, nor am I now, it is simply not that important to me and I hate dealing with contractors. The only reason I am fixing up my house is that I want to sell it. I used to do the same thing with my leased cars (I know a waste but it was something I wanted). They would be less than 3 years old, never washed with tons of kids stuff in them. DH would hate even riding in my car. Then about 2 weeks before I had to return them, I would detail them or pay someone to do it, repair them if necessary. On the last one DH was so impressed he actually wanted to buy it and use it for his car! Keeping it looking new when I owned was never important to me.

Ole joyfuls posts have convinced me to look up Derek Foster who has an interesting theory on dividend paying stocks. While it works better in Canada than in the US because of how dividends are classified there (ordinary income here) I still think there is merit if you choose well and carefully

    Bookmark   April 16, 2007 at 2:33AM
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Good for you, Gibby, to allow yourself a little indulgence. You have attended to your security and seem to have a generous nature. What else is the money good for?

And I agree with your lack of enthusiam for the financial services industry. I have worked with several different advisors over 25 years, staying with three to the bitter end (a relocation and two, count em, two corporate meltdowns and restructuring ended things.) IOW, it is not that I'm fickle; I'll stick. All were highly recommended, experienced and solid. And did seem genuinely sorry that somehow I kept managing to LOSE money as the stock market spiraled up. "This is so unusual..blah, blah, blah."

Meanwhile over in the tax deferred accounts, that I managed over those same decades, we did very well in both good and bad markets.

But hope springs eternal. In 2003 I was in a a similar situation to yours, and vetted a number of recommended advisors. The one affiliated with insurance said I neeeded more insurance (duh. I don't). The broker said I was overinsured and should look into these certain mutual funds (duh. all front loaded). And the fee-for-service guys couldn't really effectively address investing one piece of the pie without considering the whole pie, but would be MORE than happy to review everything for X thousand dollars and manage the works for X percent a year.

Ugh. Frustrating waste of my time.

I researched, made a clear plan and went with Vanguard. It has been fine.

Fine enough that perhaps I'll take your lead and get neglected things done around this place!!

    Bookmark   April 16, 2007 at 11:23AM
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Celtic - thanks for your post. I now feel less "negligent" about my approach to my finances. Seriously - I'm going to get these house things done because they are a little bit important to me - but not important enough to have borrowed any money to do something about them sooner. Then I'll save some cash in my completely liquid account for a generous emergency/peace of mind fund. Then if I have anything left I'll invest it myself in some kind of mutual fund suitable for whatever time horizon I decide on. Capital gains are an acceptable outcome - I just have to decide how much to put into something with some level of risk to principle.

    Bookmark   April 16, 2007 at 1:40PM
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Good plan.

"There's no pockets in a shroud"
- old Irish saying

    Bookmark   April 17, 2007 at 11:01PM
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Are there fee-only advisors who are surviving? Do you really want one of those? You are not willing to pay for advice, you will need to pay too much. Those who know the most either work for the very rich, and/or take % advisory fees, so the more you make, the more they make. What's wrong with that? Fire the ones who lose your money. Don't want to lose? Guarantees come from gov't, insurance & banks--not the best deals, but you WANTED the GUARANTEE. Minimizing risk in risk investments is done with Modern Portfolio Theory. You can beat the system, but it takes discernment. Want to protect principal but make equity returns? DIY takes a LOT more time, but can be done. American Association of Individual Investors is pretty good, non-profit, but boy oh boy there are a lot of irrational prejudices in the financial world, including, IMO, not wanting to pay a % of assets managed. Who wants a financial advisor who is starving? I WANT mine to be rich.

    Bookmark   May 6, 2007 at 12:20AM
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Here I am again. Zone_8grandma's recent post about meeting with financial planner and retirement readiness prompts me to post this. Thought I'd try adding this to my previous post rather than starting over.

I haven't done anything with my interest bearing account. I haven't even spent any of it since I haven't had time to work on the projects I want to spend it on. Plus DH is between jobs so I can't bring myself to spend on any discretionary projects until his "sabatical" ends.

Anyway, I have done something about finding a financial advisor. Everything I read says ask for referrals from people you know so I asked a guy I used to work with who I consider to be a smart guy, has similar views/values as mine - and someone who retired before age 60. I figure he must have good financial advice. He's worked with the same guy for a long time - 20 years maybe. Another former coworker also got a referral to same FA and she is satisfied so far. I at least liked the sound of him on the phone - low key - not obnoxious salesy type like some others I've talked to in the past.

Anyway, I have a meeting setup with the guy in a few weeks. Can you direct me to a good "checklist" of what to ask/find out about a financial advisor when you meet with one? I just don't trust someone else to tell me what to do with my money but I know I need professional help because I'm not going to do it myself. How do I ensure I have a reputable, trustworthy person like zone8_grandma's guy appears to be?

    Bookmark   September 1, 2007 at 12:53PM
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>>BTW, I always think when professionals refer you they are getting something out of it, either directly or indirectly I worked for an independent CFP for whom I developed tremendous respect. He had been in the business for 25+ years, was semi-retired (but kept doing this because he loves working with people) and not only did he have a stable client base, some of his clients were on the third generation with him!

Two years before I came to work for him, he FIRED 25% of his clients. He discovered that these 25% were more trouble than they were worth. Not just financial trouble - being rude to the office staff was included in the evaluation. Everyone was moved to a fee-only basis. If they didn't want to changeover, they were given names of other CFPs who were willing to take them as clients.

He now says he should have done it many years ago. There are some people that just weren't worth working with, no matter how much money they had.

As for referrals, people asked us all the time. I can guarantee you this CFP never received anything for making a referral. In fact, he was so successful he never did any hard marketing at all. If you can't get a personal recommendation to him, you'll have a hard time getting to be one of his clients.

    Bookmark   September 3, 2007 at 3:36PM
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