2 Common Investments with Uncommon Tax Benefits

A common question we receive at Prosperion is “where all the tax-advantaged investments?” Last week John Booren covered two simple ways to reduce taxes on income, but certain types of investments also have the potential for tax benefits. Specifically there are two under-appreciated and often overlooked investment strategies I’d like to discuss, municipal bonds and dividends.

First are common municipal bonds, which can provide steady tax-free income for investors, especially those in a high tax bracket or with a lower investment risk tolerance. The interest payments from the municipality to the investor are free of federal, and in many cases state, income taxes.* Tax-free bonds are essentially loans to the local municipalities which typically pay the investor interest on a semiannual basis. This income can be completely tax free! Currently, the rate of interest on tax-free bond is actually higher than comparable US treasury bonds according to LPL Financial research. Simply put, right now an investment in a tax-free municipal bond can offer a higher income than a similar investment in a taxable U.S. treasury bond. (Remember however, that municipal bonds typically carry more risk than similar U.S. Treasury bonds.)

Another often overlooked tax-advantaged investment is in a dividend-paying company. For those in the top tax bracket, stocks that pay “qualified” dividends may have a tax rate roughly half of other income such as interest, rents or royalties.  Think about that for a second: taxes paid on dividend income are half of what they are compared to other types of income. The top federal tax rate on dividends is 20% compared to 39.6% for other income. Though some companies may not pay a dividend or elect to discontinue a current dividend, many actually increase their dividend over time, which can lead to capital appreciation over long investment timeframes.

We believe it’s essential to have rising income during retirement and frankly I think dividends are one of the few areas where investors can seek rising income while spending less of it on taxes. Though no strategy can promise a profit or tax benefit, we’re big believers in it. That’s why we’ve created Our Growth of Dividend Strategy to seek those benefits.

As tax season wraps up, consider your investment strategy and be intentional about it. Depending on your situation, tax-advantaged investments like municipal bonds and qualified dividend stocks could be a smart move to lower your tax bill, thereby keeping more money in your pocket.

If you have questions about tax-advantaged investments or would like to discuss implementing Our Growth of Dividend Strategy in your portfolio please let us know.

Thank you for being a client of Prosperion Financial Advisors.

*Please check with us to see if the municipals we have access to offer you a tax benefit. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Steve Booren

Steve Booren is the Owner and Founder of Prosperion Financial Advisors, located in Greenwood Village, Colo. He is the author of Blind Spots: The Mental Mistakes Investors Make and Intelligent Investing: Your Guide to a Growing Retirement Income and a regular columnist in The Denver Post. He was recently named a Barron's Top Financial Advisor and recognized as a Forbes Top Wealth Advisor in Colorado.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The performance data given represents past performance and should not be considered indicative of future results. Securities and Advisory Services offered through LPL Financial. Member FINRA/SIPC.